Good afternoon. My name is Ina, and I will be your conference operator today. I would like to welcome everyone to Thinkific's third quarter fiscal 2026 financial results conference call. At this time, all lines are in 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. This call is being recorded on Tuesday, November 3, 2026. I would now like to turn the conference over to Mr. Joo-Hun Kim, head of investor relations. Please go ahead.
Thank you, and good afternoon, everyone. Welcome to Thinkific's third quarter fiscal 2026 financial results earnings call. Joining me today are Greg Smith, founder and CEO of Thinkific, and Leigh Ramsden, 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 different manner 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, founder and CEO of Thinkific.
Thank you, Joo-Hun, and good afternoon, everyone. I want to begin with our recent reorganization. On September 23rd, we announced a strategic reorganization of our workforce and operating model, and I want to walk you through the rationale behind the change and why now. Over a year ago, we announced our intent to focus upmarket, specifically on our most successful segment of customers. While we were seeing growth and even acceleration in this segment, aggregate growth was slowed by our split focus. Effectively, we were trying to run two businesses with a less-than-ideal cost structure. This reorganization commits us to our most successful business with our most successful customers in a market that is growing and has excellent future opportunity for Thinkific. We are starting to see some good data to show that this is going to work for us.
I'll walk you through three ways that these changes have set us up for success. First, we created more capacity to invest in our fastest-growing market and most successful customers. This new structure supports our focus upmarket. Our Plus business has accelerated to 18% growth from just 12% two quarters ago. Many of you have asked me for what signs to look for that this is working, and I see this as a very clear tie direct to revenue that our strategy is working. We believe we have a clear path here to become a leader in this market if we give it the focused attention it deserves. Importantly, our sales organization was essentially unaffected by this reorganization, and we expect it will continue executing without interruption. It's worth clarifying that this isn't as simple as Plus and self-serve.
I distinguish these as price points from our product, not so much as distinct businesses or markets. We see many great ideal customers come through our self-serve price points, and we're going to continue to see self-serve as an effective entry point and channel for our ideal customers. We'll continue to provide exceptional support to all of our valued customers. With these changes, our marketing, acquisition, and sales will be entirely focused on our ideal and most successful customer profile in a market where we see growth. The second effect of this reorganization is making Thinkific simpler and faster. A leaner organization means clearer ownership, faster decisions, and more time spent building and shipping value to customers rather than coordinating. The productivity gains we saw from our R&D teams after similar changes have been significant and served as a template for the rest of the organization.
We believe our customers will ultimately be the greatest beneficiary of this speed and focus. It's worth noting that we're already seeing gains in output and velocity since the changes. Finally, we transformed our cash generation profile. The substantial increase in profitability reflects the realization of permanent cost efficiencies achieved through our organizational restructuring. By flattening operational layers and rationalizing our non-core spend, we significantly reduced operating expenses as a percentage of revenue, enabling greater flow-through to cash flow from operations. The combination of these factors puts us in a position where we can deliver more value for our customers, acquire more ideal customers in a growing market, accelerate growth, and continue to realize strong free cash flow. I want to call out as well the exceptional work of our team in planning for and executing these changes, and for the hard work and focus that's been shown since then.
With a change of this magnitude, you might expect negative changes to arise. I'm encouraged to see that we've seen no related degradation in results such as customer support, customer satisfaction, and retention. In fact, some key areas, we've actually seen acceleration since these changes. Finally, I want to thank the team members that departed Thinkific. They're exceptional people who've had a positive impact on Thinkific. I'm encouraged to see that many of them have already found new opportunities, and I'll know they'll have great impact in their next adventures. Now turning to the results of this quarter. Third quarter financial performance was supported by long overdue updates in pricing and packaging. We recorded one of our largest net ARR gains in several quarters, driven primarily by our first update to self-serve pricing in many years.
We are seeing exceptional velocity gains in R&D, allowing us to launch more innovative products and improvements for our customers faster than ever before. We are also continuing to refine pricing and packaging strategies to ensure expansion opportunities from this value creation. We continue to see expansion opportunities within our customer base, and this quarter saw one of our most successful customers move up to Plus to take advantage of a number of innovative features available to Plus customers. Their business growth and their revenue, particularly in the area of selling corporate B2B learning programs, have actually accelerated since implementing these features, and we are proud to be a part of that success. Our focus upmarket is unlocking new go-to-market channel opportunities for us. From in-person events to reseller partnerships, we are seeing a number of new growth channels emerge.
We announced a partnership with Articulate, a leading platform for workplace training used by 125,000 organizations worldwide. Customers can now publish Articulate content directly to Thinkific Plus in one click, and it is Articulate's first native integration with any third-party LMS. We believe this promises to be a significant partnership with strong value added for both companies and our shared customers. It has already helped us in a number of deals and in building our pipeline. Articulate customers are exactly the kind of upmarket organizations we want, those with teams that build training at scale and need to deliver it to customers, partners, and channels. Additionally, many Thinkific customers are finding increased value and stickiness in applying Articulate to their existing workflows. Our increasing velocity unlocked a number of other wins this quarter, including professional services, making setup and custom implementations easier and faster for large organizations.
We achieved WCAG 2.1 AA accessibility compliance, and much as HIPAA has been doing for healthcare, we see WCAG compliance already creating opportunities for Thinkific in higher education, government, and other regulated industries facing new federal accessibility mandates. We continue to execute against our product roadmap at a significantly faster pace than last year. We are focused on high-impact, customer-facing capabilities that drive clear value. The velocity in R&D is exceptional and continues to accelerate. Each week, we are releasing new value for our customers across all areas of the product. In particular, we are unlocking exclusive features for our most successful customers, driving their business success and ours. Upmarket customers have more complex needs, and they are willing to pay for capabilities that help them scale their businesses.
Some recent additions this quarter include significantly improved Custom Roles, a capability that allows granular control over access and permissions for each team member, an important need for larger organizations. This has been one of our most requested capabilities. We added a series of innovations around multi-learning product and multi-learner enrollment programs, allowing our customers to easily manage delivery of many products to many groups of learners. We added Phased Subscription Pricing, allowing customers to charge one price for an initial period of time in many different formats, and then transition learners to recurring billing at a different price point. For example, $1,200 for your first year access and $599 a month thereafter. The configurations possible are extensive, and we are seeing customers take advantage of this creative approach to selling in our fully automated system. Group Experiences is another new add.
This lets customers deliver multiple white-labeled learning environments for different learner groups, each with their own branding and content. This can be helpful when a customer is selling learning experiences to multiple different corporate clients, each with different needs, allowing them to create customized experience for each of their clients. Thinker, our AI teaching assistant, is also now available as a premium add-on, which means customers can now package it into memberships and sell access directly to learners, creating a new profit center for our customers. In one of our largest launches recently, we released a completely reimagined learning experience and building experience for all of our customers. This new builder and player differentiates Thinkific from other learning systems, allowing every customer of Thinkific to create more modern, customizable learning experiences with ease. This was a milestone quarter for Thinkific.
We're now moving faster than ever before, delivering more customer value, and focused entirely on our strongest opportunities for growth in a market we are accelerating into. The changes we made put us in the strongest financial position in our history, with the highest profitability we've ever achieved. We won't squander this position. Capital allocation will remain disciplined as we fund growth upmarket and our AI-driven product roadmap. We remain committed to not spending ahead of growth. We are continuing to target a 25% free cash flow margin in 2027. We'll keep a strong balance sheet, and as our cash balance grows, we'll evaluate the best use of capital in the interest of our shareholders. I'm proud of what our team has accomplished, and I'm confident we're building a company that will endure and be a strong partner for our customers.
With that, let me turn the call over to Leigh for the financial review.
Thank you, Greg. On today's call, I'll cover the reorganization first, then discuss the quarter's results, and close with Q4 guidance, as well as provide some comments on how we're thinking about the business going forward. On September 23rd, we announced a significant reorganization in the business. As Greg discussed, our goals were to focus our team on the opportunity presented by our shift upmarket while improving operational discipline in our self-serve business. As a result of these actions, our total headcount fell from 296- 200. As we disclosed when we announced the restructuring, we expect these actions will result in approximately $19 million in gross annualized savings when compared to the expenses we would have incurred had we not made these changes. Some of these savings were realized throughout the third quarter. However, the majority of the benefit will be reflected beginning in Q4.
We expect to realize the full amount of the savings in 2027 as we further reduce inefficient self-serve acquisition activity and realize the benefit from reduced expenses associated with our lower headcount levels, such as software subscriptions and other employee-related costs. As a result of these actions, we recorded a $4.1 million restructuring charge, comprised of $4.7 million of cash-based costs, net of $0.6 million in stock-based compensation reversals. This is slightly below the approximate $5 million cash outlay we had previously indicated. We believe these actions were necessary to make the company simpler and more agile to help accelerate growth in Thinkific Plus while protecting the long-term durability of the business. Now turning to our Q3 financial performance. Total revenue was $19.0 million, up 2% year-over-year, and slightly above the guidance range of $18.6 million-$18.9 million.
We continue to see improved double-digit growth in Plus, tempered by a modest decline in self-serve as we continue to rationalize inefficient spend on new customer acquisition. Overall, total ARR increased by $1.4 million in the quarter. In addition to improvements in our Plus business, total ARR was significantly impacted by a self-serve price change, which was implemented on August 15. This price change is being phased in as each subscription period ends. Note that while ARR increased by the full weight of the invoiced price increase, the impact is only reflected in revenue for the final month and a half of the quarter. On revenue, Plus was $5.7 million in the quarter, up 18% year-over-year. Plus revenue growth is benefiting from improved go-to-market execution as we sharpen our ideal customer focus and deliver product capabilities that support higher-value use cases.
In addition to the increased subscription revenue that results from this execution, we are also experiencing improved commerce revenue in this segment on higher year-over-year GPV. Self-serve revenue was $13.3 million, down 3% year-over-year. This decrease was primarily attributable to lower subscription revenue, as we have decreased our customer acquisition activities over the course of the past year. Since our decision to pivot upmarket in the summer of 2025, we've been reducing our customer acquisition spend in self-serve, which has led to a slow decline in self-serve ARR that is now being reflected in revenue. On a normalized basis, we believe self-serve revenue will continue this trend and be down low single digits in the coming quarters. I will provide more color on our thinking in relation to the reorganization later in the call. Commerce revenue was $3.5 million, essentially flat year-over-year overall.
We did experience some mix shift as a higher proportion of commerce revenue was attributable to our Plus customers, as I mentioned earlier. GMV was $106 million, down 7% year-over-year. This decrease reflects the impact of a customer which experienced particularly strong results in 2025. While GMV was lower year on year, GPV was $74 million, up 5% compared to 2025, as higher payments penetration more than offset the decline in GMV. Penetration reached 69.3%, up 2.5 percentage points sequentially. Average revenue per user ended at $187 per month, up 8% year-over-year. This improvement reflects the mix shift to higher-value Plus customers. Gross margin was 73%, consistent with prior quarters. Turning now to operating expenses. Our total operating expense for Q3, adjusted for the restructuring costs, was $13.7 million, down 1% year-over-year.
While the restructuring was not implemented until late September, the company had begun to slow hiring during the quarter and had continued to reduce self-serve customer acquisition investments in anticipation of the announcement. In addition, the company did benefit from seven days of the lower expense run rate. Adjusted EBITDA was $1.8 million, or 10% of revenue, due to these lower operating expense levels. Cash and short-term investments were $50 million at September 30. Cash from operations was $0.2 million. The gap to Adjusted EBITDA primarily reflects September restructuring payments of $2.1 million, in addition to working capital timing. There is a further $2.6 million in restructuring costs accrued at quarter end, substantially all of which will be paid in the fourth quarter. Turning now to guidance.
For Q4 2026, we expect revenue of $18.9 million-$19.2 million and Adjusted EBITDA of 20%-25% of revenue. Following the restructuring, I would like to share more context on how we are thinking about the business and our outlook as we look ahead. The top-line outlook for Q4 assumes continued Plus ARR growth as we enter a seasonally stronger fourth quarter for customer acquisition. Offsetting this growth, we are also expecting a return to contraction in self-serve ARR after the third quarter benefit of the August price change. On the cost side, our EBITDA outlook includes the full run rate benefit of the September headcount cost reductions, which comprised approximately two-thirds of the total expense rationalization that we announced. I will now provide some comments on our longer-term outlook. Please note this should not be interpreted as formal 2027 guidance.
We are sharing these underlying assumptions solely to provide transparency in relation to our targeted business model. First off, as I previously mentioned, we are expecting self-serve subscription revenue will continue to decline in the low single digits going forward. That said, we could see greater volatility over the next couple of quarters in this customer segment as a result of the interplay of churn rates, which are highest early in the customer life cycle, and the amount of new customer acquisition. Once we are through this period, we expect churn will improve on a dollar basis over time, commensurate with lower customer acquisition levels. Additionally, we are continuing to assess opportunities in our overall pricing and packaging schema, where recent changes have led to positive impacts over the past two quarters.
We will continue to refine these opportunities going forward to ensure our customers are receiving appropriate value for our services. We are excited about where we think our Plus business can go over the longer term. We expect our sharpened focus on Plus product development and go-to-market efforts will result in healthy growth rates in this market. We have seen two consecutive quarters of accelerated growth in this segment in 2026 and believe we can continue to accelerate this trend in the future. Over time, we believe the combination of this accelerated growth profile and the stability of self-serve will result in an improved and accelerated overall growth profile for the business, with our upmarket strategy driving our future success.
As we think ahead about our profitability, we continue to believe that on an annual basis, Adjusted EBITDA is the best proxy for free cash flow, though any quarter may be impacted by seasonality or working capital fluctuations. As discussed earlier, we have planned further non-headcount-related reductions in operating expenses that will be realized in 2027. Assuming modest overall revenue growth, we continue to target 25% free cash flow margins. With that, we are now ready to take your questions. Operator, please open the line for Q&A.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star followed by the one on your telephone keypad. You will hear a prompt that your hand has been raised. Should you wish to cancel your request, please press star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Thank you. Your first question comes from the line of Gavin Fairweather from ATB Cormark. Please go ahead.
Oh, hey, good morning, and thanks for taking my questions. Maybe just to start on Plus, nice to see the execution there in the quarter with further acceleration. You mentioned in the prepared remarks that Q4 tends to be a good acquisition quarter, so maybe you can just discuss kind of the pipeline and sales activity that you're seeing in Q4, whether we could expect further acceleration, and then maybe just touch on kind of sales capacity and any headcount additions.
Thanks, Gavin. Yeah, so we do typically see strength there. We also have done a lot on the product side to set us up for success there. So we should see good strength in the three things that matter to me there, which is retention, expansion, and new deals coming in. There's a good, healthy pipeline there in that we're seeing more pipe of larger potential deals, and certainly with the partnership with Articulate, that's influencing the pipeline positively as well. In terms of acceleration, I'd say it's probably pretty similar on a year-over-year growth rate to this quarter, just because we also had a strong Q4 last year, and so there's the comparison factor. But yeah, it's looking good, and I think we'll see further acceleration into next year as well.
Okay. And then just on the sales capacity piece.
Oh, right. Yes. No immediate change in headcount there. We are pretty disciplined about adding headcount when and if we have the really clear need, and the team is doing exceptionally well and probably still have a little bit more capacity to take on more pipeline as we grow that before we need a headcount addition there.
Okay, great. And then just shifting gears to Articulate, obviously a very large customer base. It sounds like some are already using Thinkific for distribution. This will streamline things for them. But maybe just talk about how many of those customers could benefit from Thinkific for distribution, whether their sales team is going to, I guess, work jointly with you on selling. And maybe just on the price point, should we think about this somewhere in between self-serve and Plus? I know there was a lot there, but just curious for your thoughts.
Yeah. So it has been a staged approach. Really has been a phenomenal relationship so far. We attended a couple of their events already, and that has been quite positive, I think, for both companies in building the relationship, but also sharing the introduction of customers. There is definitely customers on Articulate and customers on Thinkific who are using both already and taking advantage of this integration as something that is creating expansion opportunities for both companies and benefit for the customer. And then, yes, the introductions are going both ways, and so there is opportunity there for us to, and we are already seeing the benefit of it.
The empowerment of the sales teams has just started happening recently, so initially we were focused on a couple of live in-person events where we were both building on the partnership, launching it to customers, and more in-person lead generation. Now we're moving to the empowerment, which just started happening recently. We should see the benefit of that come in shortly as well. Then, sorry, there was a follow-up piece to that that I think I missed.
Yeah, just on the price point and the economics of a deal, would it be somewhere in between kind of self-serve and standard Plus pricing, or is it full freight Plus?
Oh, like in terms of Yeah, it's the regular pricing if you're coming over to use us. There's no sort of special pricing one way or the other that you're just signing up for using both products.
Okay, appreciate that.
Yeah. I'll just add a bit more color, Gavin. It's very early days with this partnership. We've seen strong lead generation already. Of note, we are talking to larger customers than we historically have been, so we're very encouraged by the early returns we're seeing from this partnership.
Great. I'm just curious, after the restructuring and the pricing changes, maybe just discuss in a bit more detail the feedback that you're hearing from your self-serve base and some of the established customers there. Maybe just also expand on some of your comments around retention that you talked about in the prepared remarks.
Yeah. You meant specifically in terms of price. It was a pretty small change across the board, so it wasn't. In the past, when we've tried to make changes, sometimes we've gotten a little too fancy or a little too complicated. This was a very simple change, relatively small impact for any one customer, so there really wasn't much commentary on that at all because it really wasn't a massive impact on an individual customer basis. But across the whole for us, obviously, it had a positive return. Response there generally has been good.
I think the other thing to highlight here is as we've increased our efforts to build product for customers that are highly successful or well-scaled or have more advanced needs, in some ways this is benefiting, in a lot of ways, this is benefiting customers across the platform regardless of what their need level is, because a lot of these enhancements do go to the benefit of all customers. There are some, obviously, that are based on pricing and packaging tiers and available only at the higher tiers based on what fits and needs with the larger scaled customers.
But a lot of customers get the benefit of all the work we are doing, and then you combine that with the massive acceleration we have seen in our ability on R&D, obviously driven in part by AI, but a whole bunch of process and improvements, and customers are really getting a lot of the benefit of that. So, I think we are seeing across the board our customers are appreciating the quick advancements we are doing on the product for them.
Thanks so much. I will pass the line.
Thanks, Gavin.
Thank you. Your next question comes from the line of Stephen Machielsen from BMO Capital Markets. Please go ahead.
Hey, thanks. I'm just on the line for Thanos today. I just want to dig in a little bit more on the Plus ARPU growth. I mean, it's really accelerating. Are there any one-time things in that number that might not be repeatable? Can we just get a bit more color on what's really driving that 24% year-over-year growth?
Hey, Stephen. It's Leigh. Thanks for the question. There's really nothing in that that is a one-time in nature. It's just a steady, solid increase in deal size. We did book a very large customer, a six-digit Plus customer in the quarter that might have pushed that up a little bit this quarter.
Mm-hmm. Okay. I guess post the price changes in August for the self-serve customers, did you see anything unusual in terms of churn amongst your self-serve base? Did customers end up being a little bit stickier than expected? I guess generally after you implemented the changes, post the restructuring to your marketing efforts, have you seen, can you comment any more on what you're seeing in terms of churn and self-serve?
Yeah. Yeah, so we were positively surprised by, on your first question, in terms of the impact of that price change and the retention stickiness there. We budgeted a certain amount, and it came in better than budget, which was good. Part of that was just, I think, the way the team handled it quite well. The messaging was good, and the individual impact per customer was quite small. It worked out well for everyone, I think, there. Also, it had been quite a while, so we were overdue to make an update there, and people get a lot of value out of the platforms. Yeah, that one was a positive win there and a good outcome.
In terms of no direct change as a result of the changes in terms of retention, as Leigh highlighted a few times, I think when we look at the top of funnel on self-serve, because we started making changes about a year ago there, we are seeing less in the top of funnel, less trials, but that was exactly to be expected. There are probably a dozen changes we have made over the last 12 months that have led in part to that, but are also driving some of the wins we are seeing on Plus, including some of that increase in ARPU. The nice thing, to your point on the ARPU increase, is I think that is a sustainable level which we can then continue to increase from. Even with the Articulate partnership, we are seeing larger and larger potential deals coming through as well.
Okay, good to hear. Final question, just on the 25% margin into 2027. Is that really contingent on Plus continuing to outgrow the declines in self-serve? If there is an inflection where growth turns negative, can you still hit those kinds of margins?
Yeah, we are certainly planning, as I mentioned in my remarks, for modest revenue growth, which is really the interplay of Plus and self-serve. If in the event that revenue turned negative, we would be taking a look at the business and making sure we are still operating the business with the right cost structure to support that type of profile.
All right. Thanks for taking my questions.
Thank you. Your next question comes from the line of Todd Coupland from CIBC Capital Markets. Please go ahead.
Hello. Good evening, everyone. I was wondering if you could give us an idea of what the Plus subscription growth was. In other words, it seemed like part of the 18% was coming from the higher payments penetration, and I am just trying to get an idea on what the Plus subscription growth is fundamentally growing at.
Hey, Todd. Thanks for the question. Yeah, the Plus subscription growth has been relatively stable over the past number of quarters, and it is in the mid to high single digits range on a year-on-year basis.
Okay. Is that the right way to think about it before some of these AI product features start to kick in and the updated go-to-market starts to harvest that upgraded product family?
In terms of looking ahead?
Yeah.
Yeah. I mean, I think that one of the things that we're seeing is that our R&D team is very rapidly producing a lot of product improvements right now. I know we've talked about this a fair amount on the past couple calls. The pace of innovation and development is actually very impressive. What that's doing is it's helping us close product gaps to some of the competitors, as well as starting to introduce new functionality that we believe can drive further growth in the future. What that will do over time is that will help improve our churn rates in Plus, and it will also help improve our win rates in the market. We do see that accelerating as we look ahead into 2027 and beyond.
What would you say are the top product gaps that you've filled? Top two or three gaps. What would you call out as those improvements?
Yeah, I can speak a bit to this. There were some gaps in just administration and management at scale. We're starting to see more customers who have hundreds of thousands or millions of students or thousands of courses or tens of thousands of pieces of content, and just managing that, managing multiple sites through Thinkific or multiple learner experiences. The management essentially of bulk or scale programs. That was a big area that we've done a lot of work in to close a lot of gaps there. There are some other areas around assessments and certification where we've made some big moves to close gaps there, just allowing people to run certification programs, renew certificates. Some of those are still in the process and will be closed. I was looking at it, should be over the next week or two here.
These are also, some of them are gaps that influence retention and also have a direct influence on winning new deals. The nice thing is a lot of these are doing double duty where we close a gap and it can help us both retain more and also expand and also close new deals potentially at higher price points as well and influence ARPU. The nice thing is this acceleration in R&D is starting to directly influence some revenue numbers in terms of retention, expansion, and new deals. But I think we've sort of just starting to scratch that surface and that the velocity in R&D is amazing. Now we need to go and translate that into an amazing revenue impact number. Other areas are, as I talked about a bit, roles and permissions.
Certainly with bigger customers, we see more need for more granular roles and permissions. The recent update was that we've always had roles, but now you have the ability to have these Custom Roles where you can just design. You have, say, an account in your system, and you can design the exact role with the exact permissions you want for that person. Those kind of things is where we've been plugging gaps. There's other areas as well, certainly on the learning experience side. A bunch of big wins on the learning experience side, even in terms of how they're building it out, leveraging AI as well in there.
All right, last question for me. We've seen a lot about token maxing. I know you basically tasked the R&D team to use Claude. Is that going to result in rising R&D costs that might offset some of this restructuring? Just talk about how we should think about that. Thanks a lot.
Yeah, it's a great question. We've managed it closely. Certainly, we are not in token maxing mode. I've, from the very beginning, thought that the whole idea of max your token spend or comp people on token maxing is the wrong path for so many reasons. So, we've been pretty efficient with it, and our team has, from early days, been looking closely at which model to use for which task. That's really, I think, one of the key ways of us optimizing our results with our spend here. There's more optimization we can do there. The net of this, I think, is we will be spending more on AI over the next year, but I don't think it's going to erode the gains we just made.
Sorry, one last quick follow-up. Greg, when you say you will pick the model based on the task, is that basically frontier versus open source? Is that the point you are making there?
Or even it is just different, right? So, it is whether you are using GPT's model or different models for different tasks. Some of it is what is the latest version, and you may not always need to use the latest version. So, if you are at this point, let me give you a more specific example. So, let us say we are building a highly complex new piece of software, new functionality. We would use a latest, greatest, highest-functioning model potentially to do the plan. So, that would just build the overall plan of how we were going to implement it. But the actual implementation and writing of the code, we would then drop down to lower versions and less expensive models because you just do not need it. A lot of the frontier or top version of the model is just overkill for a lot of the tasks.
Especially then when you get into things like drafting a document or doing some researches, unless you are doing deep analysis, you really do not need the latest version of the model. So, that is where you can control that token spend, one way at least, and there is more we can do there. But I think the other piece on the offset side is making sure that we are translating this increased velocity directly into revenue opportunities as well. But it is not enough to just translate it into revenue. I also want to control the cost by making sure we are using the right model for the right task.
Okay, great. Appreciate that color. Thank you.
Hey, Todd, it's Leigh. I just wanted to correct one thing. I think I said mid to high single digit Plus subscription growth, and that was meant to be mid to high teens.
I see. Subscription growth ex commerce grew at 15%-18% in Q3, and that's where it's been growing for a while?
Correct. It's actually accelerating.
It's accelerating for the reasons you've mentioned.
Correct.
Okay, thank you.
Thanks for clarifying, Leigh.
Sorry about that.
I heard that, and I was like, "I'm going to double-check that." I'm glad you did.
Thank you. Your next question comes from the line of Robert Young from Canaccord Genuity. Please go ahead.
Hi, good evening. I would like to spend a little bit of time trying to maybe unpack the expected decline in self-serve. I think, Leigh, if I heard it right, I think you said that the longer-term rough guidance would be down low single digits. I am not sure if I heard that correct, with some volatility.
Yeah.
Looking at this quarter, it is down 3%, but there was a pricing change. I guess my understanding of the timing of the reduction in marketing spend would have made I know it has been ongoing over the last year, I think you said since the summer, but I would have expected that to accelerate here. I am just surprised to hear that you are as confident on that low single-digit decline. It must be stickiness. It must be maybe you are eating into Maybe all the weaker customers are going to roll off first, and you expect a stronger base. I am just trying to get some context around why you see that. It seems high to me.
Yeah, part of it Leigh, I know you can jump in with more color, but I would just say part of it is that, just to clarify what it is this is not so much about customers rolling off. Generally, once our customers have been on the platform a while, they get value. They are quite sticky. It is more about the trade on the top line. Over the last years, we have made adjustments both in what we spend and what activities we do, and even how we market and price and package and position in early sign-up flows. That is where there is the top-line erosion there, and that is intentional to potentially drive more of that to Plus and create more of an opportunity and even a brand perception moving more to Plus. For existing self-serve customers, we are not seeing an erosion there.
In fact, there's lots of opportunity there for us. It's really just not investing in the net new top line, and so that's where we see that. What that does translate to, as Leigh highlighted, is a near term, because of some of these changes we're continuing to make, where we'll see some fluctuations and more changes there. Part of that is the churn that we A big part of the churn that we do see when we see it is driven by the acquisition that we do. As we do less acquisition there over time, we'll see less churn there. Leigh, if you have more to add or clarify, go for it.
No, I think you covered it well. I think that there is some truth to the fact that our highest churning cohorts are our most recently acquired cohorts. So, as that spend comes down, over time, we'll see a natural reduction in the amount of overall churn on a dollar basis. The price increase did impact revenue and certainly our total ARR in the third quarter, and there will be a smaller impact in the fourth quarter as we experience a full quarter of that revenue bump as opposed to half a quarter. That is running on a positive basis against that slightly elevated churn that we're seeing right now as a result of the recency of the cohorts.
Okay, thanks. That's helpful. On the Articulate agreement, I think there's a co-sell arrangement. Maybe can you give any detail on whether it's like revenue share or whether Articulate is out in the market selling your product, or if it's and if you see any potential for benefit there in commercial term?
Yeah. So we have a great arrangement where we're promoting their product and they're promoting ours. We actually are doing this both through our sales teams on both sides of the arrangement and directly in the product. I think the in-product opportunity is actually really exciting to have that exposure there, where we're introducing our customers to Articulate inside Thinkific and vice versa. So yeah, definitely commercial opportunity in terms of The nice thing is it's really beneficial to customers on both sides because the integration works well, and so they get the benefit of using both platforms that often they haven't been introduced or seen the other one. Just even being at the in-person events, there's a lot of excitement among customers to have this in place, and many have been looking for something like this for a long time.
There are some commercial terms to transfer funds between company to make sure that this goes well, and that should incent people on both sides to make this a successful partnership as well.
Is there any exclusivity? I think you said it was the first time that Articulate had done a native connection with an LMS. Does that imply that they do not do this often or that this is very special for them and unique?
It is, yeah. It is the first for them, and it is exclusive for a time. I think with a good relationship, maybe we extend that. But I think we have set it up well here where there is a really good opportunity to see some good success for us, for them, and for the customers.
Okay. Last question from me, just around the cash balance, and now you are moving to a healthy level of free cash flow, and I am curious. I mean, you do not have a lot of uses of cash outside of internal investments, so I am curious how you think about using it.
Yeah, I think that's a good point, Rob. We're certainly mindful of the fact that we have a significant cash balance, and we will now be adding to it. I think that as we look ahead into 2027, we'll be working as a management team and with our board to determine the best way to deploy that capital. We've been committed to remaining cash positive and significantly so. I think we'll be looking at various options, including potentially returning some cash back to shareholders in some form.
Okay, thanks. That's all for me.
Thank you. There are no further questions at this time. I will now hand the call back to Mr. Greg Smith for any closing remarks.
Thank you. I think we've shared everything, so we're very excited by the velocity we're seeing and the opportunities ahead, and look forward to taking more questions in the future. Thank you, everyone.
This concludes today's call. Thank you for participating. You may all disconnect.