Good afternoon. My name is John, and I'll be your conference operator today. I would like to welcome everyone to Thinkific's second quarter fiscal 2024 financial results conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. I would now like to turn the conference call over to Joo Hoon Kim, Head of Investor Relations. Please go ahead.
Thank you, and good afternoon, everyone. Welcome to Thinkific's second quarter fiscal 2024 results earnings call. Joining me today are Greg Smith, CEO and Co-Founder of Thinkific, and Corinne Hua, CFO. After the prepared remarks, we will 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 uncertainties that could cause actual results to differ materially from those projected. These comments are based on our predictions and expectations as of today. We undertake no obligation to update these statements except as required by law. You can read about these risks and uncertainties 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. Finally, all dollar amounts discussed today are in US dollars, unless otherwise indicated. I will now turn the call over to Greg Smith, CEO and Co-founder of Thinkific.
Hello, and welcome to Thinkific's Q2 2024 earnings call. Thank you for joining us. I'm pleased to be reporting Q2 2024 results and demonstrate the continued success of our near-term growth drivers, in particular, Thinkific Plus and Commerce. The investments we have made to help our customers succeed and grow their businesses are paying off as we see increasing adoption of our commerce solution and strong growth in Thinkific Plus. We also made some exceptional key executive hires. Two significant wins during the quarter that are building momentum for us are: we exited Q2 with 44% penetration for Thinkific Commerce, and in Thinkific Plus, we had a record quarter for new customer bookings. As our Q3 guidance suggests, we're in a position to build on that momentum and gradually accelerate revenue growth for the second half of the year.
Also, in the quarter, we completed our significant issuer bid that saw Thinkific buy and cancel almost 13 million, or approximately 16% of the total shares outstanding. Before moving on to the results, I wanted to say how delighted I am to announce a couple of key executive appointments, which we believe will help drive further innovation and expansion of our business. Joining us as Chief Revenue Officer and Chief Product and Technology Officer are Amanda Malko and Ryan Donovan. Amanda comes to us from G2, where she was CMO, and before that, led the partnership program and marketplace business at Mailchimp. Ryan has held executive roles at other notable companies like Hootsuite and Grin. Joining them are Clovis Kukui, heading up Commerce, and Kyle Scott, working with high-growth creators.
I believe they will add another level of depth and strategic excellence to our executive leadership team, enable us to fully capitalize on the immense opportunities ahead of us. Now on to the results. Total revenue in Q2 increased 12% year-over-year to $16.2 million. The growth was driven by continued strength in Thinkific Commerce, which grew 69% year-over-year, and Thinkific Plus, which grew 28%. As I mentioned earlier, Thinkific Plus had a particularly strong quarter and achieved record new bookings in Q2 following a strong Q1. We believe that companies are increasingly looking to offer education to their customers in order to enhance brand loyalty, drive higher retention, and monetize their institutional knowledge as a new revenue stream.
We see how the market is evolving, and we are positioning ourselves well to meet what is a significant and very fast-growing opportunity in the sector. In order to continue to drive our opportunities pipeline, Thinkific recently implemented strategic Plus-focused marketing efforts, which highlight the sectors and use cases that Plus has a clear competitive advantage in, like customer education, as with training centers and academies, where quick time to value, ease of use, and native commerce capabilities are key differentiators. To give you some idea of the success here, new logos bookings represented 80% of the total net increase in Plus ARR this quarter. Looking at our sales pipelines, we believe new logos will continue to represent most of our growth for the foreseeable future. We also continue our pace of innovation on the Plus platform.
To be able to attract a greater number of business customers, we achieved SOC 2 compliance last year. We have also now implemented SCORM, a set of e-learning technical standards that ensures content portability across various LMSs. These improvements give Thinkific the ability to compete head-to-head with the incumbent players with respect to security, scalability, and portability. In addition to helping in Q2, our implementation of SCORM is now available for us to go back to customers that love Plus, but required SCORM. And indeed, we have already seen several companies reenter our pipeline. One significant win in the quarter was Growth Tribe, a learning partner for individuals and organizations specializing in data science, growth, innovation, and customer experience. It has a powerful alumni network of 35,000 professionals and over 1,000 corporate partners.
Growth Tribe had been using a homegrown LMS since its inception, but had been struggling to maintain and scale existing capabilities while developing the new features necessary to digitally deliver education to their B2C and B2B customers. They evaluated several vendors, but quickly chose Thinkific due to the completeness of our platform, our advanced analytics, and the seamless integration of Thinkific Commerce. SCORM was also vital to Growth Tribe, choosing Plus as a smooth migration plan for its entire digital education library, with an overarching criteria for their selection of a partner. Also this quarter, a large financial services company with over 2,500 employees and over $1 billion in revenue chose Thinkific Plus because of its ability to integrate seamlessly with their existing CRM systems while facilitating compliance workflows in their highly regulated industry.
They also like Plus's robust user experience, which offers interactive features and its responsive design that supports B2B and B2C sales with Thinkific Commerce. The core use case here is customer education, where the company hopes to optimize its often underutilized courses to improve its onboarding process and enhance customers' education experience, which they believe will improve retention, increase engagement, and also grow sales of other services and features they offer. Sales team productivity measurements were impressive this quarter, and given the increase in our sales funnels from our enhanced marketing efforts, we've decided to accelerate our investment in our go-to-market teams and plan to increase our quota-carrying sales force by over 50%. That, along with an exciting release schedule of new features and enhancements, makes me confident in our ability to maintain Plus's robust growth at current levels, if not accelerate into 2025.
Strength in commerce continues, driven by a combination of penetration rate and growth in GMV. In fact, we achieved a significant milestone as the cumulative GMV of our customers broke the $2 billion mark this quarter, a testament to the increasing success our customers are enjoying. Last quarter, I shared with you some of the positive benefits our customers see when they move to Thinkific Commerce. For example, Thinkific Commerce customers have seen up to 22% larger transaction sizes. Value-added features like gifting have been shown to boost sales by more than 6%, and payment options like buy now, pay later, can boost transaction size by 8%. As more customers adopt Thinkific Commerce, the feedback we are receiving from our customers has been overwhelmingly positive.
Speaking to the impact Thinkific Commerce is having as they scale their business, Jacques Wong, CEO of an accredited online insurance course provider, T&T Learning, said, "We're already seeing more revenue due to the order bump feature, and I'm looking forward to new revenue optimization features being released in the near future. The transition over to Thinkific Commerce was easy with Thinkific's support team and resources." Ulrich White, CTO of The Finding Center, told us, "Once I heard about the unbelievable feature set of Thinkific Commerce, I simply had to migrate, like, yesterday. What clinched the deal, you ask? Pure, unadulterated upside. Plus, the new sales tax reporting, order bumps, and buy now, pay later, made it a no-brainer for us." I'm also pleased to report that we're taking the first steps to begin monetizing The Leap, our mobile-first platform that caters to social creators.
Thinkific is adding paid pro and elite plans to The Leap, which give creators the ability to list more digital products, manage more customers, and access priority support to help them propel their growth. The delivery of scaled services on The Leap comes after a highly successful beta launch, which is now approaching 30,000 free users versus the 20,000 we reported last quarter. Beta users with The Leap's innovative mobile product format earned 64% more than those selling just eBooks, templates, and other digital downloads. I do caution, however, that we're rolling this out in a measured way and not expecting it to be a material contributor to revenue or profitability for 2024. However, the size of the mobile and social-first creator market is significant, and with partners like Spotify, it's potentially transformative for the company.
Speaking about Spotify, we're still in very early with our partnered test, and there is still much work to be done. That said, we're seeing solid engagement with the courses and many new creators who wish to use Thinkific as their on-ramp to Spotify Learning. While we're seeing some excellent results in Commerce and Plus, there remains one key friction point to our overall performance, and that's total customer count. Our total customer count trend rate is something we do want to accelerate beyond what we've seen in recent quarters. However, Q2 customer count fell by 200. Th largely a result of a number of self-inflicted one-time events related to the timing of campaigns and trials. We understand what happened, and we've since corrected these problems.
However, beyond what happened in Q2, we had previously identified friction points in the onboarding process, and I want to discuss what we are currently doing to achieve our paying customer growth acceleration goal. First, we're adjusting our approach to activation of new customers and product-led growth. We can see where in the funnels customers drop off, largely in the early stages of activation. We know we can fix this, as we've seen the impact of doing this well on The Leap, where top-of-funnel volume is very strong and activation rates are 2-3x higher. Leaning on some of the successes we've seen with The Leap, I believe we can transfer those best practices to our core product and achieve similar results. Second, we're focusing our go-to-market efforts on customers who are better positioned for long-term success.
These customers tend to achieve better outcomes and contribute to higher ARPU and long-term value. While I am disappointed with the miss in paying customer counts, I see the reversal and acceleration of growth here as more of a when rather than an if. One reason I feel so confident is that we are seeing a strong top-of-funnel visitors and customer interest continuing to come to Thinkific. This, combined with the two initiatives I mentioned a moment ago, will deliver growth here. Expect to see customer count stabilize for the rest of 2024, and I believe we're in good position to see customer count be a more meaningful contributor to growth in 2025. With that, I'll turn the call over to Corinne.
Thanks, Greg. Good afternoon, everyone.
... I'm pleased with our team's execution in key growth areas, specifically adoption of Thinkific Commerce and new customers on Thinkific Plus. We closed the second quarter strong, with record new customer bookings in Plus and a significant acceleration in the adoption of Thinkific Commerce features. We also made some key executive hires, which I'm excited about. A strengthened executive team, alongside our planned go-to-market and product investments, puts us in a great position to build on our momentum through the rest of the year. As a result, we expect an acceleration in top-line growth rate, as reflected in our Q3 guidance. Before I move on to results, I want to provide some details on the substantial issuer bid, or SIB, we completed in the quarter.
Thinkific repurchased and canceled 12.9 million shares, approximately 16% of our total shares outstanding, at a price of CAD 3.72, for a total of CAD 48 million, or $35 million. As a result of the SIB, our total shares outstanding on the completion date of June 24th was 68.2 million shares. The SIB represented a chance for Thinkific to reduce dilution for shareholders, align our valuation more closely to the growth and performance of the business, while retaining enough cash on hand to execute our profitable growth strategy. Now on to results. Q2 2024 revenue was $16.2 million, up 12% from the prior year. This solid performance was driven by a combination of strong commerce revenue growth, which benefited from the increased adoption of our Thinkific Commerce solutions and strengthened Thinkific Plus.
Together, both helped improved ARPU, or Average Revenue Per User, to $155 per month, up 10% from the prior year. Subscription revenue of $14 million was up 7% year-on-year, and ARR grew to $57 million, also up 7% year-on-year. Subscription revenue and ARR continue to benefit from strong Plus growth. However, the softness in self-serve customer acquisition that Greg discussed led to a contraction of self-serve ARR of approximately $500,000 versus Q1 results. As Greg said earlier, we expect the self-serve results to stabilize in the back half of the year, with stronger growth expected in 2025. Thinkific Plus continues to demonstrate strong execution, giving us confidence in our ability to accelerate the growth in the second half of the year.
Commerce revenue was $2.2 million, up 69% from the prior year, and the growth in commerce revenue was a result of continued adoption of our commerce features, alongside the continued success of customers using our platform to monetize their expertise. GMV, or Gross Merchandise Volume, which is the total value of commercial transactions of our customers that take place on the Thinkific platform, was $111 million, up 4% year-on-year. GPV, or Gross Payment Volume, which is the value of commercial transactions that take place on Thinkific Commerce, grew to $44 million, up 40% from the prior year. The higher rate of growth of GPV versus GMV is due to expanding adoption of Thinkific Commerce, which we define as a measure of our penetration rate. The penetration rate is simply GPV as a percentage of GMV.
Penetration in Q2 rose to 40%, 33% higher than the 30% in Q2 of 2023, and 3 points better than the prior quarter. As we announced in the last call, we have now implemented a gateway fee on third-party payment providers, which came into effect on July 3rd. The fee is intended to cover the cost of our integrations with third-party vendors and to start the conversation with our customers about moving on to the Thinkific Commerce platform, whose features and capabilities have proven to improve transaction sizes and reduce administrative overhead. We believe the announcement of the gateway fee is having a positive impact, as we saw the penetration rate jump to 44% at the close of the quarter, just before the gateway fee became active, versus the 40% average we saw in the quarter.
We believe we can maintain this momentum into Q3 and are increasingly confident in our ability to achieve our goal of reaching a penetration rate of 68% by the end of 2025, which is a doubling from our 2023 exit rate. Quick note on take rates. We saw a further uptick in take rates this quarter, which increased to 4.7% from 3.6% in the prior year and 4.5% in the prior quarter. As new customers' adoption of Thinkific Commerce accelerates, it is possible that we can see some volatility in this number, as we are near the high end of our optimal take rate, given our current offering.
We plan to introduce new features specifically for our highest GMV customers and those on Thinkific Plus, which are required before we can see a material improvement in take rate beyond current levels. Now on to revenue by customer group. Our self-service segment, whose customers are primarily entrepreneurs and creators, saw revenue grow to $12.5 million, up 8% year-over-year. The increase from the prior year is the result of growth we have seen from our commerce platform, along with a 2% increase in our paying customers from the prior year. Thinkific Plus, a revenue of $3.7 million and growth of 28% year-over-year, similar to the prior quarter's growth rate.
Plus had a very strong quarter, and we saw record new customer bookings arising from the continued product innovation, including our recent SCORM implementation and continued increase in lead volumes, thanks to the efforts of our dedicated Plus marketing team. Digging into the SCORM feature, this is an important technical standard which makes it easier for customers to migrate to Thinkific. SCORM also enables customers to access third-party content authoring applications, which provide innovative tools for our customers, along with future partnering opportunities for us. Note that bookings are deals we signed in the quarter but may have a future start date, so the revenue and inclusion in ARR will start in future periods. We are pleased with the momentum in Plus and are looking to expand our go-to-market capabilities.
I'm confident we can maintain Plus growth at current strong levels, if not see an acceleration in growth in the coming quarters. Moving on to the PNL. Growth margin of 75% was reasonably consistent with prior quarters. Commerce growth margin rose to 39%, up from the prior quarter's 33%, which included a one-time sales tax-related fee. Commerce growth margin has been steadily improving as customers utilize higher margin value-added services available on Thinkific Commerce. Subscription growth margin of 81% remained consistent with the prior quarter. Moving to operating expenses. Total operating expenses for Q2 were $12.3 million, down 15% from the prior year and 8% from the prior quarter. The decrease in OpEx year-over-year reflects the cost realignment the company has completed, and our further sequential decline from Q1 was due to our annual company-wide kickoff in the first quarter.
Adjusted EBITDA was positive for the fourth consecutive quarter at $875,000, or just better than 5% of total revenue. Q2 adjusted EBITDA was higher than recent quarters due to the timing of certain expenses, including the timing of new hires, which happened late in the quarter. On the bottom line, we delivered net income of $900,000, and going forward, we expect operating expenses to increase through the rest of the year from current levels while maintaining profitability. Turning to the balance sheet. Cash and cash equivalents at June 30, 2024, was $48.6 million.
The decrease in cash from the prior quarter was largely a result of the $35.3 million substantial issuer bid, which I provided details on earlier, and approximately $3.1 million, which was used in our normal course issuer bid, where we further purchased an additional 1.2 million shares. Consistent with our disciplined capital allocation strategy, we are committed to continuing to grow the company while returning capital to shareholders through our NCIB, which resumed earlier in July, following a pause during the SIB period. Cash flow from operations remained positive at $180,000, down from the prior quarter, related to fluctuations in working capital. Turning to guidance.
For the third quarter of 2024, the company expects revenue in the range of $17 million-$17.3 million, which represents a growth rate of 14%-16% versus the 12% in Q2. The acceleration in growth rates incorporates continued growth in GMV, which, along with improving Thinkific Commerce penetration rates and a small benefit from the gateway fee of around $250,000, which will grow commerce revenue. We also expect continued growth in subscription revenue, driven by the strong bookings activity from our Thinkific Plus business at the end of the quarter, which has continued into Q3. We are committed to maintaining positive adjusted EBITDA. However, we will continue investing in the business to accelerate top-line growth. Now I'll turn back to Greg for closing comments.
Thanks, Kareen. In closing, I just want to recap my excitement for the future at Thinkific. We ended Q2 with strength and believe we will be able to maintain that momentum. You've heard us speak about our focus on commerce this year, and the results speak for themselves. Commerce, combined with our investments and success in Plus, are driving our acceleration in revenue growth in the back half of this year. I want to take a moment to extend my gratitude to the Thinkific team for their exceptional efforts this period. Their commitment to equipping our customers with the tools and support necessary to build thriving businesses is continually elevating our company. Thanks to their dedication, I believe we're in a solid position to accelerate growth as we capitalize on the significant opportunities that lie ahead of us. Now on to Q&A.
Thank you. Ladies and gentlemen, we will now begin the 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 two. Please ensure you lift the handset if you're using a speakerphone before pressing any keys. One moment, please, for your first question. Your first question comes from the line of Gavin Fairweather from CoreMark. Your line is now open.
Oh, hey, good afternoon. Maybe just to start on the payments, I think the surcharges came into force in July, that customers were notified in April. Can you just discuss how that was received by the base? And then I'm also curious if that contributed at all to the downtick in paying customers in Q2, or was that solely tied to gross additions?
Yeah, happy to, and then, Kareen, you can probably jump in with a bit more on it. But, we did notify customers that that was coming, as of July third. And so there was some advance moves in the quarter that helped accelerate the adoption of Thinkific Commerce, and that's all been quite well received. Obviously, anytime there's fees or pricing changes, there is always some concern among some customers. But for the most part, the reception has been quite good, largely because those who are adopting Thinkific Commerce are really seeing the value there. And we're working with customers to make sure that each and every one, as much as possible, is happy with the situation.
No direct contribution that we've seen of any significance in terms of churn related to that, though. So, yeah, no direct relationship there that we've seen.
Okay, great to hear. Then just on Plus, there was an interesting enterprise example in your prepared remarks. I know you've been working on the product to position it to move higher up market. I'm curious if you're seeing kind of that trend within the pipeline?
... I'll, I'll, answer this plus question. We have seen some really interesting customers, some of which are coming back into the pipeline as we release our SCORM features. And so I think there's an opportunity for us to continue to look upmarket, especially for customers who don't just want to educate their customer on their platform, but also want to use it as an additional revenue stream, as our commerce features provide a unique differentiator in the market. And so we are seeing a fair bit of opportunity. And the example that Greg said is a great example of, you know, what we're seeing fill the pipeline today.
Okay, and then next for me, I guess on Spotify, we're about four months into that pilot. Can you discuss any KPIs around kind of user interest or monetization and, you know, any kind of discussions you're having around potential expansion with Spotify?
Yeah, so I wish there was more we could share at this point. Still pretty early to share, and obviously with another public company involved, we're quite sensitive as to, you know, what there is to share. It's still pretty much a test and working on it. Lots of excitement, lots of good things happening, lots of interest from customers who are coming. So all sorts of positive things coming out of it, but no, no KPIs that we could share at this point.
Okay, and then just lastly, maybe for Corinne, just on EBITDA margins, 5% certainly surprised to the upside in the quarter. I guess I'm curious about the outlook for the second half. You know, on one hand, you have accelerating revenue growth, in the back half, but you're also leaning in on growth investments. So I'm curious where that kind of nets out for the margin trajectory.
We did see some expansion in our margin, and at 5%, it's probably a little bit higher than we were expecting. Most of that is due to timing between when we were expecting to have our new executive members joining the team and when they actually joined, which was later in June. And so there was a bit of a timing gap there. Going forward, probably looking to bring that down just a little bit while maintaining profitability. Definitely want to continue to invest in where we're seeing growth today, and so have intentions to do things that return a really positive ROI while still not, you know, breaking into a negative profitability, but keeping expansion or sorry, keeping EBITDA margins, you know, kind of a little bit closer to where we were the last two quarters.
Q4, Q1 is probably a healthier place for us to be targeting as we look into the back half of the year.
Okay, that's it for me. Thanks so much.
Thanks, Gavin.
Your next question comes from the line of Robert Young from Canaccord Genuity. Your line is now open.
Hi. I just wanted to dig into the net add decline a little more. I think you suggested that it was driven by promotional activity that was went wrong, or maybe if you could give a little more color around that. And then just added to that, the decline in self-serve ARR and the net adds. I'm assuming that those things are driving each other, but maybe you could correct me if I'm wrong on that, or if there's any other thing that's driving the self-serve ARR decline.
Yeah, you're correct. They're directly related. And, and so that's... yeah, directly related. And then just to get into a little more color on the self-inflicted mistakes there. Part of this look is investing for the long term and trying to increase the overall acceleration of customer adds and customer success. And part of that means running experiments around marketing, trials, onboarding. And so some of that, with some of the work we were doing there, which I think we've now figured out some wins that we have, which is great, but it did come at a bit of an expense within the quarter.
In addition to that, just some of the timing, in terms of how things worked out at the end of Q1 and then coming into Q2 around trials and campaigns, it was sort of call it a perfect storm of some of the, customer count changes there that added up into hit one quarter in particular. But it's something that we've done some correction, which I think will stabilize it now. And then as we look forward, we have really an eye on two key things that are giving me confidence. One, that top of funnel traffic is strong, so we know we have the demand.
Two, I think we have a good idea of what we need to do to actually turn the tide to shift this overall trend to quite a positive add, more so than it's been in the last couple of years.
That's helpful. Thank you. What you just mentioned, the strong top of funnel activity, how long typically does it take a paid customer to go through the funnel? Is it something that would happen within the year? Or, maybe just revisit the timing there.
Yeah, I mean, the timing can be quite quick. Sometimes it happens on the first day, first visit. You know, averages are closer to the 30-45 day range, but I wouldn't translate that directly because there is work we have to do to see these things shift. The demand and the volume is there, but there's still work we are executing on. So that's why I'm seeing it more as figuring this out over the next couple of quarters. The nice thing is we're still seeing an acceleration of revenue as we figure this out, because we have multiple levers where we can drive revenue in the business. But I would see this particular part on the customer count accelerating in the start of next year.
Okay, and this last question on the bookings growth at the end of the quarter and plus, you highlighted a bunch of different things that might be driving that. Maybe you could revisit those factors and maybe rank order them, give a sense of what's driving the customer bookings there. Is it SCORM? Is it, you know, the pricing? Is... Maybe just go through that, and then I'll pass the line.
Let me, jump in on that one. So you're right, there were a number of things that led to it. I think first off, I gotta recognize that the dedicated Plus team is doing a great job of identifying Plus specific customers, and so really, marketing, has, you know, kind of really come along in terms of bringing us what we need to the sales team. And then I'd be remiss if I didn't call out the exceptional execution of our sales team. Record new customer bookings is a great place, and while, you know, some of those deals do land in future periods, it really shows what the team's capable of doing. And not only did we end Q2 strong, but really started off Q3 in a great way, and so that's a big part of it.
New logos were the biggest part of the growth, and so the real, you know, thing that we're seeing is the opportunity to continue that execution. The team is delivering strong there. I think the opportunity for us to drive further acceleration is gonna be on the expansion side, and so that's something we're looking at, not just today, but also into the future of, you know, how do we really continue to focus there? That's probably the next opportunity. But in terms of the three things, dedicated sales team, record new bookings, and then just really, you know, focusing on new logos.
If I can squeeze one more at the end. Is the average contract value on Plus growing larger? Is it outpacing ARPU, or is there any color you can provide there around the size of those Plus deals?
For sure. Our ARPU this quarter grew nicely at another 10% growth to $155 a month, and so it's in a healthy place, and a lot of that's coming from commerce and Plus. Plus's average transaction size is around $2,000, but starts at $950, so, you know, there's a fair range there. We have seen it move a little bit, you know, based on, you know, different marketing campaigns that we're going at for different sectors. The two main use cases we're looking at here are customers that are, you know, training centers, higher education, and those tend to, you know, come in with more of a focus on monetizing their content, and so the commerce play really drives up the ARPU.
For customers that are educating their own customers and, you know, there's not a monetization element that comes first, the ARPU there can be a little bit, a little bit higher. But you know, often our goal is, or always our goal is to help them find, you know, revenue opportunities so we can continue to see them using our commerce tools, 'cause they're a real differentiator for us in the market.
Okay, thanks for all the color there, Greg
Just to clarify all those... Oh, yeah. Thanks, Rob. Just to clarify, all those figures are monthly ARPU and transaction values.
Thank you.
Thanks, Rob.
Your next question comes from the line of Thanos Mastrapolis from BMO Capital Markets. Your line is now open.
Hey, this is Steven McKelson on for Thanos. Just on the uptick in commerce penetration, are you seeing any split between, I guess, Plus customer and self-serve customer adoption?
Most of our focus today has been on the self-serve side of the business. We see the Plus opportunity as a future growth lever for us, and some of it has to do with the product set. Today, lots of the features are focused on those that are, you know, selling B2C, and on our Plus side, the opportunity is more on the B2B side. They do cross on both sides of the, of the business, for sure, but there's more focus on the B2B side in our Plus business. And we are just looking at rolling out some of that in the second half of the year. That'll really address those customers' needs and make it the right time for us to focus on adopting Thinkific Commerce. And so today, most of it's self-serve.
Okay, that's very helpful. And on the, I guess, investments in the new go-to-market teams, what kind of ramp period do you expect before these new quota-carrying reps become fully productive? Like, is it a matter of three months, six months?
We're usually looking at 3-4 months. We've got a number of new team members, as Greg mentioned. I'm joining the team right now, and they'd ramp into their quota over the next 4 months.
Okay. I guess final question: I know it's very early days with the new Leap paid pricing system. I'm just wondering if there are any early learnings in terms of the free-to-paid conversion that you're seeing there versus maybe the core self-serve product?
Yeah. I think there's plenty of learnings that we're drawing from the Leap in terms of design principles, user experience, onboarding, activation rates. I think the standout is 2-3x the activation rate. So the rate at which a new sign-up is sort of getting through that initial onboarding, getting something set up, building a product, and getting it to market is significantly better. And so we're leveraging a lot of the learnings there to apply to Thinkific self-serve, which also benefits Plus, of course, to start to bring that into the core product. So that's probably the biggest learning there. On the free to paid, it's still pretty early to tell.
It is at a lower price point and so we're yeah just still early in the game in terms of rolling out pricing and testing there. But the activation rates are encouraging and that should continue to drive through into paid plans over the course of next year.
Okay. And just one final one, more of a, I guess, an accounting question. So, with the paid The Leap customers, are they gonna be included in the paid customer count that you normally report, or will it be broken out separately?
We would start including that. They would similarly be in ARPU. So we'll include Plus, self-serve, and the Leap customers all in each of the metrics. And then once it becomes, you know, something significant or material, we could look at start breaking it out, but at this point, we'd include everything in one.
Right.
I should say, we are seeing good conversion rates on the free-to-paid, if that wasn't clear earlier.
No, very clear. All right, thank you.
Yeah.
I'll pass the line.
Thank you.
Your next question comes from the line of Richard Ziff from National Bank. Your line is now open.
Yes, thank you. This is James sitting in for Richard. I was just wondering, with the new gateway fee on third-party payment providers, I would imagine that the uptake in the attach rate should accelerate. Could you just provide us any kind of soft guidance on how you see the payment attach rate scaling this year and maybe for the next two to three as well?
...We did see a nice exit rate as we came out of Q2, closing at 44% in the final weeks as we were leading into the gateway fee becoming applicable. And we've seen continued strength as we've gone into Q3. Our target is to double the penetration rate that we saw at the exit of 2023, and so to be more specific, it's actually 68% target for us for the end of 2025. So we're moving nicely in that direction. And I know that we've got, you know, continued work to do, but seeing, you know, good penetration, it's really all because customers find success in the platform, and it does help them sell more.
And so as long as we can continue to, you know, provide results to our customers, they're gonna continue to adopt the platform, and so see ourselves in a good trajectory to get to that target of 68% by the end of 2025.
Okay, that's great. Thanks. Then just one last one here for me. On some of these new customers that you're winning, are most of these kinda like new business startups, greenfield opportunities, or are you winning these from some of your competitors?
The focus today has been really on people that are doing this for the first time. The real benefit of our platform compared to others, is how easy it is to get started, and that comes from the fact that we started in self-serve, and so it's really a platform. Our launch team plays, you know, a great role in this, and so I don't wanna, you know, miss out on all the opportunities we have to be able to help customers find success because of our team. But the platform is easy to use, and so it's a good place to get started. The rollout of SCORM should open up additional features that allow us to be able to move customers over more easily and kind of allow us to move up market even further, and so that's an opportunity for the future.
To date, we've really focused on those that are, you know, doing this for the first time.
That's great. Thanks. I'll pass the line.
Your next question comes from the line of Todd Coupland from CIBC Capital Markets. Your line is now open.
Good evening, everyone. I had a couple questions. First, on the reduction in customers. So you're basically saying that you had, you added customers with aggressive marketing over the last year or two, and they didn't turn out to be successful, and now they're starting to roll off the platform. Is that more or less, is what's happening?
No, no, I didn't mean to imply that. It's not largely, you know, an acceleration of churn from prior years. That, that's not what I'm trying to imply on that one. It was more around, although there was some, but it was primarily around the marketing campaigns in terms of acquisition. So it was a lesser acquisition within the quarter due to some of the campaigns and trials that we were running.
Okay. But I mean, these are-
Yeah, in particular, some of the timing and how they all landed together, there was sort of a perfect storm of a few different events that came together to have a negative impact on the top line. Acquisition of customers is more than the largest factor.
I see. So you had normal churn, but you didn't add enough new customers with the in-quarter marketing campaign?
There was slightly more churn, not... So the primary source, there's a few factors that played into it, but the slightly accelerated churn was short term. So not customers who've been here for a long time, it was customers who were, you know, had only been here for a few months, and it was sort of related to this timing of trials and campaigns and experiments that we were running.
I see. Okay. Okay, I get that. I wanted to ask you about the bookings. Why are the bookings not helping ARR growth? Like, ARR growth was 7. That didn't seem to move. So wouldn't that go into ARR?
The reason why we
Yeah.
Yeah, let me, let me jump in. The reason why you're seeing that gap is, bookings fall in future periods, and so while ARR is a point in time, June thirtieth, to be specific, some of the contract start dates would have fallen into, into a future period. Most, most of them are Q3. And so you'll see that hit ARR in a future period, but the bookings number speaks to what's already been contracted. So that's why there's a bit of a timing gap, and you don't see as much of that hitting in quarter.
We do have a strong quarter, I think, but the reason why we're seeing some of it is just, like, the timing of when it came in and then when the timing of when the contracts closed, give us a ton of confidence for the future, but don't give us the lift we would have loved to have seen right in the quarter.
Yeah.
Okay. So, like, if you were to look at the I don't know, bookings growth rate versus ARR growth rate, is that, is that something you wanna quote?
I think what you can imply from what I'm saying is our bookings rate was higher than our ARR close rate. So I think you can imply that from my, my message, yeah.
8% or 30%?
Maybe not quite ready to share numbers on it, but it's implied in the-
Is it clearly higher than the 7%?
It is. The thing that's worth noting is that, the 7% includes the decline in self-serve, and so the overall you're seeing, you know, the net of the two numbers. And on plus, we did see, you know, another strong quarter in terms of what they added in ARR, but an even stronger bookings number.
Okay. So net of the—so your point there is net of the loss, losses in self-serve, adjusted A growth, bookings growth would have been higher than that adjusted growth. Is that what you're saying?
Exactly. That's what I'm saying.
Okay. Okay, and then sort of the last question, I thought some of your examples of use cases of customer acquisition or customer education were interesting in financial services companies. Is—I mean, that makes a lot of sense. Is this a big vertical or an emerging vertical? Can you maybe just describe what's going on there and whether or not that turns into a segmented focus area? Any additional color on that would be helpful. Thanks a lot.
Interesting question. We do look at, you know, where are we finding success from, you know, different verticals, and there isn't really one area that we're overly focused in. Although, you know, as the team grows, we have more opportunity to be able to do some verticalization. The example of the financial services wasn't a specific example, this is where we're seeing strength, but there are opportunities for us to continue to lean into, into that vertical, but nothing specific that we are trying to indicate other than just in the customer education space. These are places where we're able to find success.
Okay, I understand. Appreciate all the color. Thanks a lot.
Thanks, Todd.
Your next question comes from the line of Martin Toner from ATB Capital Markets. Your line is now open.
Hey, thanks for taking the question. Can you talk about the increase in OpEx that will come from new hires, both exec level and in sale?
Sure. So what we will be looking at is kind of closer to what we saw in Q1. Q1 was a little bit higher from an OpEx perspective because of the annual kickoff, but probably a good proxy for what we're expecting in Q3, and then growing a little bit higher in Q4 as we continue to invest in growth levers, as we are growing our revenue top line. The focus for us is to invest dollars, you know, not faster than our revenue growth, but to be able to, you know, maintain profitability, but invest as we're finding green shoots that we can invest in. And so that's gonna drive some OpEx, but the new hires and the executive team won't take us specifically above where we were at in Q1.
It'll be continued investment in both our product and go-to-market factors that will drive growth into Q4.
That's great. Thank you. You're having a lot of success with commercial and businesses using you like an LMS. Can you see that being like half the business or more of the business? Can you see it being more important than the, I guess, grassroots creator customer?
I think that it's a really exciting part of the business, and as Corinne highlighted, we've got an amazing team there that's come together, you know, across that whole team to do a lot of good work, and we're, and that's a big driver behind all the growth we're seeing. So we are not holding back on investment there. It's an opportunity. We're excited to see how big it can become and how many people we can help there. So there's not gonna be... So yeah, we're, we're investing there, and we see it as a huge opportunity for investment. In terms of percentage of business, you know, that'll, that'll depend on how much other areas grow. So my hope is that it maintains current or accelerating growth rates, but we also accelerate other areas, and so we continue to keep that balance.
There is also a lot of synergy between the businesses. When we look at the self-serve business, it does continue to help drive a lot of growth and exposure, brand recognition, demand for Plus. And similarly, Leap is having a positive impact on all of this now as well. So there's a lot of synergy of all of these coming together with a similar use case, from different types of customers, and that's working quite well for us. So I think we wanna continue to grow each of these areas of the business, around that core product. And it also means that when we do R&D investments in one area, it helps others. You know, the things, the investments we make for self-serve help our Plus customers. But again, we're gonna continue to invest.
We really see this opportunity in Plus as something we want to invest more in and see that opportunity for growth, but too early to say, you know, whether it becomes the biggest part of the business. My hope again, I think, is that we continue to accelerate growth in each area.
Thanks for that, Greg. That's it for me.
Thanks.
There are no further questions at this time. I will now turn the call back to Greg Smith for closing remarks. Please continue.
Thank you. Just wanna highlight some of the things we said on the call, that really excited to see that we are now moving into a period of accelerating growth as we look to the back half of the year. Some really big opportunities there, and high confidence in delivering on those. Plus, we've now figured out some of the areas where we've seen challenges for quite some time, that as we dig into those, I now see line of sight over the next few quarters to starting to accelerate the growth in the areas that have lagged. And so the combination of those should lead us into an excellent, well, an accelerating growth rate in the back half of 2024, and then even better in 2025. Thank you.
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.