Q3 2020 Pluralsight Inc Earnings Call

Ladies and gentlemen, thank you for standing by and welcome CQC Twentytwenty floral side earnings conference call. At this time all participants lines are in another thing only mode. I think its speaker's presentation, there will be a question and answer session.

Ask a question during the session, who you will meet the press star one on your telephone keypad and if he would like to withdraw your question press the pound key.

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I would now like to hand to conference over to your Speaker today Mr., Mike Mike Mcreynolds Director of Investor Relations. Please go ahead Sir.

Thanks, Maria good afternoon, and welcome to pull sites third quarter 2020 earnings call. Joining me remotely are airing scattered co founder and CEO and James Bunch CFO.

Our remarks today may include forward looking statements, including those about guidance and future results of operations. Our actual results may be materially different based on a variety of factors, including their ability to execute our business. During the COVID-19 pandemic the impact of the crisis on our customers and partners and government action taken in response to call. Good night team.

Among other factors.

Forward looking statements involve risks uncertainties and assumptions that are described in our SEC filings.

These forward looking statements are based on our beliefs and assumptions today, and we assume no obligation to update any forward looking statements.

During this call we will present, both GAAP and non-GAAP financial measures, except for revenue balance sheet amounts cash flow from operations and billings, all financial amounts discussed or not yet.

Unless otherwise stated growth comparisons are measured against the same period of the prior year. A reconciliation of these measures is included in todays earnings release, which you can find on our Investor Relations website.

With that I'll turn the call over to Aaron.

Thanks, Mark Hello, everyone and thanks for joining us.

We're proud of the progress we made in the quarter, while still in the midst of because the 19 pandemic we.

We handily beat our revenue earnings and cash expectations in Q3.

And given the strength, we see in our pipeline and forecast for Q4, we have confidence in the raised annual revenue and earnings expectations. We included in today's earnings release.

Q3 billings came in lighter than we had expected due to two factors.

First the continued impact from Cove it.

And second shifting P.S. life from August to October this year, the latter caused a corresponding timing shift and the benefits from P.S. life from Q3 to Q4.

Let me share some quick stats on P.S. lives.

We had over 29000 participants in our virtual P.S. life experience this year compared to about 3000 at last year's event.

Additionally, we had over 2.4 million lives stream views through social media and the pipeline represented by the participants this year exceeded 250 million compared to 95 million last year. All of these are positive signs. However.

However, given that this is our first virtual P.S. why we don't know yet how the higher participation and pipeline will translate into billing.

Programmes with their top business priorities, such as moving from one cloud vendor to another.

It builds on our plurals site IQ Foundation and makes it possible for executives to track skilled progression metrics against a specified timeframe.

The delivery module measures data from <unk> to visualize the human interactions that occurred during the software development process.

This capability helps engineering teams understand how they are progressing against their goals and identify opportunities to optimize collaboration and work flow.

The need for this knowledge will only increase in importance for our customers as they continue to adapt to the new reality of remote working.

And finally as I shared it P. S live a few weeks ago, we're very excited about our recent acquisition of develop intelligence.

Develop intelligence or D I.

Is a leader in designing and executing live Upskilling Reskilling and Onboarding programs for enterprise customers.

They also provide strategic skills consulting for enterprise Tech team.

D. I is known for delivering high quality experiences to fortune 500 customers for.

For companies undergoing significant transformations or that have recurring skill development needs such as Onboarding, new engineers or ongoing reskilling programs.

D. I provides the quickest and most effective way to upscaled teams around those initiatives.

D. I have been network of exceptional instructors, who were also practitioners just like the thorough site author community.

And many of our customers already work with them to pair tailored virtual I O T programs with plural site skills.

Typical I L. T providers operate on a transactional basis that can create unpredictable revenue streams.

D I on the other hand has established relationships with large enterprise tech team.

Their biggest customers typically sign on for annual deals, where they handle all onboarding reskilling and upskilling programs.

And we've already started negotiations with some exciting enterprises on a combination of D I services with skills and slow.

Covid is forcing companies to permanently move from traditional classroom training to virtual or digital experiences.

With this acquisition, we now offer a more comprehensive instead of skill development solutions, our customers need to navigate this new future.

These new product and delivery capabilities combined with our existing platform capabilities enable all of our customers and especially our largest customers and their teams to accelerate skills transformation.

Our customers no longer have to work with multiple vendors to build tech skills, because we're the all in one technology workforce development company and.

And with that I'll turn the call over to James.

Thanks, Erin and Hello to everyone tuning in in the face of another full quarter of Covid impact I'm pleased that we were able to sequentially improve on.

Nearly all the results we delivered last quarter.

<unk> to be billings grew to 88.6 million.

And total billings grew to 100 million.

Our first quarter other than Q4, two O nine figures in billings.

And represents an 11 million dollar billings increase in Q3 over two two.

Our pipeline as strong coming out of a successful P. S live and we are confident that we will achieve our annual goals with another strong Q4.

Historically by far our best performing quarter of the year.

As a result, we expect to accelerate our total queue for 2020 billings to approximately 12 to 13 per cent your over your growth.

We continue to expand deeper into our largest customers and in Q3 with 86% more customers with annual billings greater than $1 million.

Q3 revenue grew by 20% to 99.5 million.

About 4 million over the high end of the range. We previously provided.

And is expected are rolling for quarter average gross and net retention decreased.

We are replacing pre covid quarters in the four quarter average with Covid impacted quarters.

The four quarter Rolling average at the end of Q3 from a grocery tension was 83 per cent and net revenue retention was 113%.

With retention figures from our enterprise business being quite a bit higher than the average.

We expect our four quarter rolling renewal rate to begin to expand again in 2021, as we move beyond Covid I'd see spending patterns begin to return to normal.

Or go to market investments in Q3 continued to be overweighted toward our enterprise and high end commercial customers.

Which resulted in our highest average deal size today.

Up about 20% over last year.

The tradeoff in Q3 was a higher percentage of churn in our smaller accounts, which offset the new high end commercial and enterprise logos, we added in the corner.

R Q3, gross margin increased to 81% up from 80 per cent.

And net loss per share in Q3 was breakeven.

A significant improvement over last year, and a huge milestone for us our first quarter of breakeven P&L profitability. Since we began developing our enterprise go to market motion in 2016.

Our gross margin in EPS continue to over perform and give us confidence that we will trend towards sustainable earnings and cash flow profitability in 2021.

Ah collections and the timing of those collections are coming at ahead of our expectations and we remain well capitalized with $537 million in cash and investments on our balance sheet.

Cash used in operations was only 2.4 million in free cash flow was negative 14.9 million inclusive of about 8 million for a new building in Q3.

Both operating a free cashflow measures were well ahead of what we expected and demonstrate are accelerating path to repeatable cash profitability.

We now expect to remain operating cash flow positive for the full year 2020, and expect that trend to continue into 2021.

Turning not a guidance for.

For the full year 2020 revenue, we are increasing the midpoint of a range by 6 million.

And with one quarter left in the year tightening the range to $387 million to $390 million and.

An increase of 23% at the midpoint of the rage.

This means that for Q4 2020, we expect revenue to be in the range of 101 to 102 million [laughter].

[laughter].

Order and a year ahead of us.

Our market continues to grow we've strengthened our platform and offerings for our customers and we're confident that we'll be able to close out the year with strong momentum to carry us through 2021.

We built thorough site to help our customers create empowered technology team that drive improved performance.

There has never been a time when our products have been more relevant and now.

<unk> sighed exist to be a trusted partner for technologists and their leaders to build better skills better ways of working and better products I'd like to thank our customers partners our community of expert authors and our team members for their continued support.

And with that I'll turn the call back over to the operator for Q&A.

And that's at this time, if you would like to ask any question you'll need to pass it started wanting a telephone keypad and can tell your question press the pound our husky mailbox for just a moment to compiled that can't near Austin.

And your first question comes from the lineup Sterling Audi from J P. Morgan you're lying is open.

Yeah. Thanks, Hi, guys. So just wondering with the billings result in the quarter, but you're still raising guidance you talked about your confidence in being able to deliver the increase forecast for the fourth quarter, maybe can you give us a little bit more color as to the experienced in the first month of the quarter.

Or what you've seen after plural plural site live and maybe the pipeline and conversion just something that that feeds into the confidence that you can deliver obviously this quarter you just did 20% revenue growth off of 10% billings growth last quarter's tourist doable, but just help us kind of you know bridge the gap.

Yeah. Thanks, Sterling James here Uhm, a couple of things I'd highlight.

P. S. Live was was big I mean, you heard the numbers from Erin and the number of participants in the pipeline associated with those participants.

Was a huge number now of course, it's a virtual event, we don't know how that's really gonna translate into buildings, but it's it's certainly going to help in many ways to our billing is expectations for the fourth quarter. It's the best closing of that we have for four years running now that we've been running P. S. Live in that will probably be the same result here in the fourth quarter. So P. S. Live is one that I.

I would highlight.

Uhm and had some impact quite frankly, a little more impact on the third quarter relative to the fourth quarter than we previously expected to be honest. Obviously, we knew we would always know we were gonna have the P. S live event in October, but what we didn't expect that some of those deals that would've had strong closing event from P. S live in August.

That those would slip into the fourth quarter, so spelled highly confident that we'll get those done coming off of the strong closing event that we now had from P. S live in the fourth quarter. The second item I'd I'd highlight here is.

We we talked we've talked about three April in the past, that's certainly been of benefit to us and our <unk>. Our BTC numbers would have been less good. If we didn't have free April and I would say that the last couple of quarters, we kind of said Hey, we're in the early days of seeing how P. S live on the beta beside translates into.

Pipeline and ultimately billings and we see that starting to firm up and become strong for us here on the fourth quarter. So those two items on the billings side I would say give us some pretty good momentum really good momentum going into the fourth quarter P. S life and strength from free April from the B B pipeline build throughout the year.

Great and then Aaron one for Ya you know with the acquisition that you've made it looks like you're kind of building a hybrid model almost in terms of tapping into some of that I L. T. You know opportunity how quickly should we see some of the moves that you've made actually translate into you know revenue.

Contribution.

You'll see it translate pretty quickly Sterling and you know we the way we recognize revenue with with that business is upon delivery of those services and we have we have several very large enterprise account that were work.

With right now in queue for to bring into this to bring it is new customers for this new offering beyond what already exists in the current customer base.

So you'll see you'll see billings and revenue actually have billings will will essentially be revenue upon delivery of those services. So the dynamics of that of that.

That Billy extreme is different than what you see in our skills business and we have a lot of exciting opportunities already in the queue and you know the deal cycle I would say is about similar to a skills deal you know it takes about as long to get.

One of these annual agreements in place and and get those programs designed and and running but we got got a lot of momentum already right out of the gate with with the acquisition.

Great. Thank you.

You bet.

And your next question comes from the line of <unk>. Your line is okay.

Okay, Great Hey, guys. Thanks for taking my questions here.

Aaron maybe maybe for you can you just talk a little bit about the competitive landscape you know it.

It's it's a fun question to ask every corner just sort of see if anything's changed but you know just I was wondering if you just maybe connect that the whether you think the competitive landscape maybe played a bigger role in the third quarter be to be performance or if this was really just sort of the the the the timing issue was kind of that P. S lives pipeline.

No. Thanks for the questions jacket, I think competition definitely played a bigger role in the third quarter than it has in prior quarters, but only in the small business segment uhm.

That's where we saw the <unk> the most logo churn uhm, especially because of the covid impact on those segments in some cases those those customers you know just stopped using any vendor or are they switched to a lower cost vendor.

We feel really good about where we are heading into the fourth quarter for the remainder of the year.

Very helpful. Thanks, guys.

Yes, okay.

And your next question comes from the line of Hana Rudolph from the D.A. Davidson Your line is open.

Hi, guys. Thank you for taking my question today, just wanted to start off could you talk about how much conservatism, you're really baking into guidance for Fourq, you and what you're kind of modeling in terms of churn and willingness to spend on the company side there.

Yeah, I mean, it's hard to give you something specific on conservatism because that would give away all of our secrets here, but.

Probably bear fruit long term.

Great that's really helpful. Thank you.

You bet.

And your next question comes from the line if Brian Peterson from Raymond James Your line is open.

Hi, gentlemen, thanks for taking my question, So Erin I I wanted to start with one for you tell the industry question, but but obviously, we've seen a lot change in terms of the pandemic in and if we think about the budget spent on in classroom training I think it's fair to say that enterprises across the board or probably not able to do that today.

So I'm thinking about the benefit of where their budget dollars have been spent and how that will migrate to two different forms of technology I'm curious when do you think that happens right. We're all kind of reacting to the new normal today, what are those conversations happening in earnest right now or does that happen next year I'm just curious room.

We'll start to see that those budget dollars really shift from a macro perspective.

Yeah, Great question, the eighth conversations are happening right now with with some companies, but not more broadly like like I'm hearing you referred to as a sort of an industry trend, they're still clear covid frost in place.

But covid is definitely accelerating the transition away from that traditional I L. T model towards the virtual I L T and digital solutions like like what we offer with Pearl site skills and now with D. I, we have the virtual I L. T offering so so we.

We do see some strength around it now because some of those companies have to start shifting those dollars and they have to train the new engineers that they're hiring and especially in the large the large tech companies. The large enterprises the higher lots of engineers all the time.

But I I I think it's gonna be a little bit longer before we see it really kick in and it really becomes a strong tailwind for the business and.

And I would expect that that happens you know some time in Q1 or towards the end of Q1.

You know based on what we're seeing in the macro environment.

We believe we're really strongly positioned to help those companies make that transition and back to the.

To the the acquisition announcement, that's exactly why we did that because we believe we can help companies do that transformation like and accelerate that transition away from traditional classroom approaches to these new hybrid approaches and then over the years ahead, we can help them even more fully.

Move into pure digital solutions overtime.

Right and and could segue to my next question, but for customers that may have overlapped, if we're kind of a virtual classroom learning it in the legacy skills platform, how does their value proposition change or are you thinking about the idea of of maybe facilitating that back in the plastic classroom and being able to reinforce what they're learning there.

I'm just curious how do you think that changes the value proposition. If you can sell both platforms to the existing cause yes. Thanks, Matt Yeah <unk> a couple of things you bet. One day now I'll get to work with a single vendor they haven't been able to do that ever before single vendor strategic relationships. So that's value right. There we can.

Bring the overall costs down for them overtime, that's value number two.

And three we can help them strategically design those programs to take advantage of the best of both worlds. The best things are looking for from the live virtual instruction combined with what we offer in our in our digital skills solution. So that custom enterprise centric approach is is.

Really you know the value proposition and in the end and and and being able to be that all in one solution for the customer and this further differentiates it's from the competition. This is a an approach very unique to us and our capabilities and it drives us even further ended up fortune 500 global 2000 space.

We think that.

He is a great blends into what the renewals might look like as we come into them in the middle of next year and later part of next year lots of usage and lots of value in the platform.

We'll continue to do.

Drive better engagements going for higher retention rates all the goodness that comes from that maybe a second metric I'd give you as well is.

Got it so the.

Just shifting gears a little bit the big deal you did last quarter to seven figure deal flow deal has that enabled you to increase engagement with some of those larger customers that you're that you're working.

Working with.

Customers that we can we can bring them flow and further deepened the value proposition, we can deliver to all of those technologists to really uplift the entire technology workforce within those company.

Okay. That's great. Thank you guys have a great night.

Thank you.

And again, if you would like to ask any questions you want me to pass starting one on your telephone keypad.

And your next question comes from the lineup Steven Sheldon from William Blair. Your line is open.

Hi, guys. Thanks for taking my questions I guess first can give an update on the rough number of <unk> users on the platform now and then with the the increase so far this year and with some of those users coming out on a lower price point, when you could potentially drive more monetization of those users essentially calm.

And the renewal process near the end of <unk> early to queue in 2021, given the big jump you saw on those quarters.

And your next question comes from the line of Arvind Freedom Nanny from Piper Sandler Your line is open.

[laughter].

Mr them Nanny here along is now open you may now ask you a question.

Im order when you work through their size, there's some level of revenue sharing that takes place.

Q, how <unk>, how do you think about the opportunity how should we think about timing potential contribution from cloud labs.

Yeah, I'll start and James and add on if you want thanks for the question Josh.

In general we have seen strong demand for this type of hands on learning experience within across all of our excuse and so what we've decided to do with this offering is included in our enterprise skew for up to a certain number of licenses. So we provide ah.

Percentage of licenses in the skew.

As part of the enterprise value proposition with an up sell opportunity that sell to the entirety of their base.

Retentions that we're now seeing we believe getting past the worst of Covance.

Questions and for joining US today, we look forward to speaking with all of you again next quarter be well and stay safe.