Q2 2023 Docebo Inc Earnings Call
Yes.
Yeah.
Okay.
Thank you operator before we begin we'd like to remind listeners that certain information discussed today may be.
Looking in nature, such forward looking information reflects the companys current views with respect to future events.
Any such information is subject to risks uncertainties and assumptions that could cause actual results to differ materially from those projected in forward looking statements.
For more information on the risks uncertainties and assumptions relating to forward looking statements. Please refer to <unk> public filings, which are available on SEDAR and Edgar.
During the call, we will reference certain non <unk> financial measures.
Although we believe these measures provide useful supplemental information about our financial performance.
Not recognized measures and do not have standardized meanings under ifr us.
Please see our MD&A for additional information regarding our non <unk>.
S financial measures, including reconciliations to the nearest FRS measures.
Please note that unless otherwise stated all references to any financial figures are in U S dollars.
Now I'd like to turn the call over to <expletive> <unk> CEO Claudio variable.
So everybody and thank you for joining jobs for our second quarter earnings call with me today, our president and CEO .
Brian Soller, our senior Vice President of Finance Brendan in assuming you've also got a meet up our CFO .
Why even for that valuable, albeit first child, we got him and his wife the very best.
Good morning, I will begin with a high level summary of our results.
We are pleased to report revenue growth of 25% in the June quarter.
EBIT end of our guidance range, our profitability also exceeded our guidance with an adjusted EBITDA margin of 7%.
From a macro perspective, we sold trend consistent with the prior quarter enterprise segment spending that you've been showing signs of stabilization.
Our pipeline is healthy.
SMB customer took a more cautious approach due to macroeconomic impacts geographically, we haven't seen activity really beginning to pick up.
How are you.
Right.
I have kind of successfully partnering with Amazon, which always browser pawn loans booked in Q3, we signed a major deal we did not that big by U S based global technology need jobs.
This partnership will support multiple use cases, including a large expand the audience. Additionally, we leverage data January <unk> received two transponder daily video personalize it doesn't even get scale and integrate cutting edge features and functionality into the tables learning.
Paul.
To further advance our leadership in AI, we acquired <unk>.
This acquisition enhances our capability in large indebtedness language modern technology.
<unk> brings a team of experts AI engineers on board.
We anticipate that these acquisitions will contribute.
Innovation engine.
It may be a leading player.
Jenny intelligence and learning automation.
Look forward to providing more updates about our development roadmap and the Japanese buy it in September .
<unk> customer base.
Impairment China's we are becoming increasingly excited about our expanding presence in the government vertical also known as the fed and flat in.
In Q2, we continued to demonstrate the viability of our platform through successful wins municipal provincial as bank level customers.
To further expand our customer base.
Federal and state government Gusto matter, we are beginning the process of becoming fed ramp compliance in the United States within the next few quarters.
Scott said, we see these market there is an excellent pillar for long term growth.
We have made strategic hires to bottoms olberman specific vertical team.
Building with Barclays channel partner relationships with a high return of garbage firms such as with Softbank and other largest system integrators.
Bedight, our access to the Goldman this space.
Our capital allocation strategy focuses on two areas selective Madison and acquisition and the share return of capital to shareholders.
Evaluation that become a more profitable we completed two tuck in acquisition this quarter.
We will continue to evaluate opportunities.
Is it on data potential to address a broad spectrum of use gain this complement our platform.
Before concluding my remarks. This morning, I want to thank Martino by Jamie previously Chief corporate development Gafisa, a longtime partner timeframe for as a service as you decided to embark on the new jobs that'll be denied we wish him all the best on behalf of the entire company.
Martinez, California development responsibility will sign the final sort of getting today Sean.
We will elaborate just what got us private equity expertise and gives athene strong capabilities there.
We worked closely with me on future corporate development opportunities.
In conclusion, despite ongoing macroeconomic challenges that that becomes the new normal our customers recognize that from Charlotte.
You can necessity to drive topline growth and core component of the index.
The tables to all financial operational efficiency, and improving profitability position us for sustainable balance loans.
As we emerge from this economic cycle the investments, we make will further strengthen our position and accelerate with triple growth no.
Now I would like to turn the call over to our CFO will give you an operational update.
Thank you Claudio and good morning, everyone.
Or to the company wide average contract value increased over 8% to $48100 from around $44500 at the end of quarter two 2022.
ACB for new customers in the quarter was about 61000 compared to 50000 in quarter one.
The growth in ACD is driven by increased penetration among enterprise customers with deal values of $100000 in the Euro dollar accounting for approximately 50% of growth.
In quarter two.
50% of these new customers that have chosen the table for three or more use cases, which further highlights the strength of our platform and our ability to serve our various complex audiences with Wanda stable.
We saw healthy contributions from mid market and large enterprise customers both during the second quarter.
Our sales pipeline as we look out some of the end of this year.
Our commercial segment or SMB has been more impacted by the cautious spending in market environment, resulting in some SMB churn there that affected our net new customer adds in the period.
Regardless gross retention held relatively flat quarter over quarter, our focus remains on capturing optimal unit economics in our mid market and enterprise pipeline.
This is demonstrated through our strategy all number one.
Supporting external and hybrid use cases, what almost 50% of our pipeline is external used cases, they think and what do we have the highest win rate.
Number two we continue to expand our partnership with large system integrators.
Both commercial and government enterprise contracts and number three.
Almost 30% of our wins this quarter came from Rfps.
I would like to highlight this with a few new customer wins Upsells and cross sells.
In terms of new customer wins in Germany, we were selected by Rolls Royce power systems for our ability to address multiple use cases, including customer training franchisee training internal onboarding and sales enablement.
In North America, we signed the deal with Unity <unk> Catholic hospitals, serving the greater Metropolitan area Toronto.
This organization selected the chatbot to address their onboarding and ongoing training initiatives for their physicians nurses and staff and medical University students.
Also in the outskirt vertical the Royal College of physicians and Surgeons with Canada chose the table as a future block format to provide its members with flexible access to continuing education communities of practice and maintenance of certification program.
Hei hotels, and resorts hotel investment and management company with over 100 properties with brands that include Hyatt Hilton Marriott Sheraton and Westin towards the table for our functionality scalability and content offerings to support their brands.
Among the noteworthy upsell.
Vmware with using the chatbot for a variety of internal and external use cases, including customer training channel training membership trading.
As cloud you called out earlier, we're making very good progress in the government vertical.
In the second quarter, we were selected by large provincial government agency in Ontario, Canada.
They chose <unk> for our AI powered global search and content creation capabilities, including shape as well as for our track record service will be supporting their internal use case for Onboarding and professional development.
While in the U S working closely with a large big four system integrator. We won an external compliance use case for a major department with the state of Georgia.
Please select the table for our robust functionality and ease of use they're calculated learners.
We believe that the turbo can do very well within the government vertical for a number of reasons.
Number one.
The performance of human capital is one of the largest focus areas at every level of government today.
Number two.
The first steps in this process will be.
<unk> from outdated legacy platforms.
We have experienced this in the commercial segment and are now executing to repeat the success of swapping out outdated incumbents in the government sector.
Number three we need to address internal and external use cases, the governments are bringing forward awarded giving local state and federal agencies, the sustainability to consolidate their tech stacks.
Number four.
Initiating fed ramp certification allows us to compete in more rfps at the federal but also state and local levels in which state rems certifications that are more frequently required.
<unk> got the additional high value growth opportunities.
Now I want to frame out our government vertical strategy by saying that we're working with our channel and select system integrators, who has a well established government business units and are able to accelerate our right to win in this space.
Additionally, we are aligning with other key players, including distributors like <unk>, who can help us to swiftly and efficiently carryover the chipmos success from the private sector.
As a reminder, this process takes time before the fed ramp certification is achieved however, our initial investments are showing traction.
During the quarter, we notably added to our roster of OEM partners.
First.
We entered into a global OEM Elias with a big four system integrator, which will white label that shareholder the LMS technology as the underlying technology used to address the customers and workforce upskilling and reskilling requirements.
We also added Darwin box fast growing HCM solution provider focused in India and southeast Asia.
With their intimate understanding of the working cultures of this region. We believe that this partnership can open up new geographical opportunities at an accelerated pace.
We're especially excited about their presence in India, the young workforce with the large and fast moving market for which is a typical solution is ideally suited for.
Our OEM alliances are a core pathway into both the enterprise segment and new Geos and we're pleased with how these new partners expand as pillars of growth.
Both opportunities will be a ramp up mode over the next 12 months and we look forward to seeing their contributions add to our OEM and partnership results.
Moving forward, we will continue to prioritize innovation customer satisfaction and enterprise segment growth.
We're confident that our strategic planning exactly the execution and commitment to excellence will enable us to continue delivering the results that our customers have come to expect from the table.
With that I would like to hand, the call over to Brandon.
Thank you Elias and good morning, everyone for those interested a detailed breakdown of our financial results for the three and six months ended June 32023 can be found in our press release, MD&A and financial statements, which are now available on our website and also filed on SEDAR and Edgar.
Total revenues for the second quarter grew to $43 $6 million, an increase of 25% from the prior year and exceeded our guided range of $42 nine to $43 2 million.
Subscription revenues were $40 8 million, representing 94% of total revenue for the quarter and an increase of 28% from the prior year.
Annual reoccurring revenue was $172 nine an increase of 25%.
In the second quarter, we gained 85 net customers, bringing our total customer count to 3591.
This represents a 16% increase from the prior year.
Average contract value for the second quarter was approximately 48000, an increase from 47000 from the first quarter of 2023, and an 8% year over year increase.
Gross profit margin for the second quarter improved by 70 basis points year over year to 81% of revenue and what's consistent with the prior quarter.
Total operating expenses for the second quarter increased to $42 7 million from $25 nine in the prior year during.
During the second quarter, we recorded $4 1 million in onetime costs related to beverages.
<unk> costs and acquisition related earn out.
<unk> primary adjusted EBITDA calculation.
We expect our restructuring activities to be completed during Q3 2023.
G&A as a percentage of revenue increased to 21, 4% for the second quarter compared to 18, 2% for the first quarter of 2023.
Adjusted for the onetime severance and acquisition related costs G&A represented 18, 3% in revenue.
Sales and marketing as a percentage of revenue increased to 41, 4% for the second quarter compared to 45 for the first quarter of 2023.
<unk> for the $1 5 million of restructuring costs sales and marketing represented 37 eight of total revenues.
The investments we made in the IP systems at the beginning of the year, we anticipate to continue to gain operating leverage in sales and marketing over the next few quarters.
R&D investments from the second quarter were $8 8 million or 22% of revenue an increase from $7 4 million for the first quarter of 2023.
Adjusting for the $1 million of the previously mentioned onetime costs R&D, representing 17, 9% of total revenue.
We expect R&D to be closer to 19% of revenue in the next quarter as a result of our acquisition of peer Gordon as you go.
Adjusted EBITDA performance was $3 1 million for the second quarter of 2023, 7% of revenue, which is above our guided range of five five to six 5% of revenue.
We reported a net loss of $5 7 million for the second quarter of 2023 compared to $2 1 million net loss for the second quarter of 2022.
Adjusted net income for the second quarter of $7 9 million increase compared to adjusted net loss of <unk> 8 million for the first quarter of 2022.
We generated positive free cash flow of $7 million and also earned $2 4 million in interest income.
Given our strong cash flow generation since announcing our and CIB, we deployed $10 2 million towards repurchasing 279676 common shares.
Share based compensation accounted for a modest 3% of second quarter revenues compared to four 4% in the first quarter of 2022.
Now for our Q3 2023 outlook.
Due to the large deal we signed with the U S. Big five tech customer, we anticipate higher incremental revenue within the quarter.
We expect total revenues ranging between $45 nine.
Nine and $46 1 million.
We expect gross margin to range between 80 and 81%.
We expect adjusted EBITDA margin to range between seven five and 8%.
A few noteworthy points on the third quarter.
We expect subscription revenue to be two to three percentage points higher than the overall company revenue, while professional services revenue to remain relatively flat quarter over quarter.
The macro environment that we're operating in remains consistent with what we've experienced the past several quarters.
Okay.
In conclusion, I want to hit on three points.
As we look forward to the next few quarters, we are seeing encouraging trends in the enterprise government segment as well as our OEM channel.
We are successfully moving towards the balance approach to growth and profitability as we continue to expand our adjusted EBITDA margins, even while investing in our AI roadmap expanding our go to market teams in the government sector and incurring costs to become fed ramp compliance.
Lastly, we reiterate our profitability guidance that to achieve a will exit Q4 2023 with adjusted EBITDA margins of 10%.
That concludes my prepared remarks, operator, please open the lines. So that we can take questions from the analysts.
Thank you Sir.
Ladies and gentlemen, we will now begin the question and answer session.
If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
If your question has been answered and you would like to withdraw from the queue. Please press star followed by the number too.
If you are using a speaker phone please lift your handset before pressing any cheese.
And as a reminder, we ask you to limit yourselves to two questions and return to the queue for any follow ups. Please standby for your first question.
Your first question will come from Suzanne Souccar at Stifel. Please go ahead.
Thank you.
Morning Gents.
Congrats on the.
Another solid print here.
Firstly I just wanted to touch on your global Tech customer win I think Thats fair.
Another key a key endorsement.
Close your announcement with <unk>.
Amazon.
Just firstly just wanted to see if you could share some color on in terms of what you see.
In terms of changes.
Over recent quarters with respect to the enterprise sales cycle.
And on the and.
And on the Big Tech deal, it's the Gulf.
Any color you can share on.
The size of the deal and what use cases, R&R and focus and.
And from a competitive perspective.
This is a displacement opportunity or.
Or.
Where was it say.
A broader set of competitive win here.
Yes.
Claudio speaking.
The more we move upmarket.
The more we discover our enterprise customer.
Do we <unk> because we provide that.
So PC game solution.
So PC games.
Okay ecosystems.
So the capstone heartbeat.
<unk>.
They buy a solution.
And Thats, where example, haynesville in Tableau index Stephan landscapes.
The use of the debate with home depot and data sources for it.
Sample.
In parallel training.
You have to use a provisioning is coming from.
HR platform you saw but then they can come from CRM.
All the more we move up market.
Moore, our capstone suite.
Sweet for us.
Because the deal with sophisticated use sophisticated environment. So if we gave them some street showrooms sophisticated tracking and.
This is Luke.
Tell me more and more.
Sweet spot.
So you are a very big company with very sophisticated we use case.
Scalability needs and solid sawn business, where the triple trial.
We want to add something Brendan.
Sit on Super excited for this win.
It's one that's been.
In the works for a while.
You were asking about the value we can say that.
<unk> <unk> seven figure.
Project.
Additionally, I can share since youre asking that.
The primary drivers of the success, we're alongside what cloud was saying guessing game or modern.
Highly Ali.
Highly personalized experience for various learners across multiple use cases.
Whether those are more on the enablement side or externally facing.
And.
<unk>.
Frankly, the idea here is.
Is that we are very proud to have spent a lot more time, if you will.
On navigating the processes all purchasing all of this great organization than we have.
Beating competition.
During the selection process.
We found that our capabilities are aligned exactly with what the company was looking for and therefore the selection process was relatively simple.
When compared to more extensive.
Contracting phase.
Having said that we're happy to to analysis and.
Yes, looking forward to more.
Yes.
Couple of points.
Okay.
First of all.
These deal.
<unk> done.
Done in partnership.
<unk>.
These for a system integrator.
We partner with them because that was all the.
It will probably myself technology when you deal with.
Complex.
And viral maintain complex needs you need to partner with those guys.
Point number two I mean.
We love to work with Technology Council not slow.
We can also leverage their own technology in general.
So very boring when I speak about AI, which is my.
Meaning grocer.
Give us another opportunity to bottom in on AI.
Great.
Thank you for that thank you for that color.
Just one question I had was on the on the public sector and I saw that you guys are seeing some.
Pretty strong, but the early momentum here.
Can you talk a little bit about what the opportunity you see overall.
From a public sector perspective, what's the Tam.
10 potential here and what is your go to market.
Approach here.
It looks like is it more direct it could partners play a key role here.
Any color there would be appreciated.
So just speaking today as we've done that.
Yes.
Each sector will discuss with you with the latest you'll probably two years ago was like we need them.
To cope with the public sector, because first of all the competition that is almost nonexistent towards better legacy SaaS.
So we're look again on the 10 year contract and now this momentum we ought to be renegotiating and changing the technology with some modern technology.
The bond deal you wanted to test the public sector, because it sort of CBS all economic cycles.
There is a downturn that usually as well.
Public sector spend more and thats, what we needed to make the business model, so our resilient and less volatile.
Public sector is going to be good for me was when you got any more lending opportunity can you scope out the cycle of the market, which is very different from bad debt out to state for example, and we are referring only to US Then there is Canada.
Another couple of points.
And so that you approach together with system integrator.
And we have both.
Most beautiful partnership we are doing now.
We built and also this can complement our offering less volume.
We are exploring.
The New company, we have acquired I think the goal would be performance fee or does that take.
The possibility to be in that one.
Let me Love was model so as to what you.
<unk> saw U S.
Government cloud without going outside.
Did I compliant.
Environments.
And then this is a key differentiator I mean, not only we added more than vendor.
Ross we bring.
In an environment, which is highly protected protective.
Without going and connecting it outside the fed ramp certified environment sorry.
Technical but this is very important because I believe the government also need a lot of innovation.
You can that you can take that.
Yes. Thank you.
Sit down again, great momentum here across the federal and sled.
Our state local education.
Just for clarity, we have already been mildly successful in the sled side without a whole lot of specialization in the past so our incremental focus on slides, we believe will yield a higher win rates and better results. This is proven by.
Our recent success with closing.
The state of Georgia, working closely and to do that we have to work closely with large system integrator and another success with the larger provincial governments Ages agency, Ontario.
I think one of the things that we'd like to.
Clarify is.
<unk> is.
Eight opportunity that is shorter term for us that we're working very closely with distributors like hear us off to get better.
Execution of all of it.
Do we think about federal it's a little bit.
All the different paths in the sense that it takes a little longer we have less experience in it but we're taking all the right steps.
Just last year alone and I think.
Federal spending LMS.
It was close to $200 million.
So we believe that we have the tanks store technology like cloud you said, an enormous amount of right to win and our process of fed ramp.
As if you will the compliance.
Step two real affirm ourselves in a market that necessitates new technology, which we have since we closed that gap will be able to tap into it effectively and we're already bidding in a very aggressive in it. So we're very optimistic.
And then we see the great momentum.
That's great.
Thank you for the color I'll pass along.
Your next question will come from Robert Young at Canaccord Genuity. Please go ahead.
Good morning, I think you just said that the.
U S Tech deal was seven figures, so I guess that could be 250000 in the.
The Q3 guide.
Are there any other onetime items.
Peer board and as you go or those smaller should we think of those as a contribution.
And.
When you look at the pipeline are there other larger deals seven figure deals still out there to win or are you still working on it you said the deals or is this.
Something that we should expect only once in a while.
Hey, Rob Brian is here I'll take the first part on the guidance so signing.
And subsequent to quarter end.
Obviously, you were able to recognize more eight quarter revenues in our typical trend of signing the majority of our enterprise deal over the last 60 days of the quarter. So in your commentary is correct.
But it also speaks to the visibility in our enterprise and mid market pipeline, which gives us confidence as we look to the remaining of the year.
I wanted to point out if you look at the midpoint of our guidance at roughly represents 25% growth, which is equal to our Q2 growth on the EBITDA side, Although we are making investments in Q3.
We did want to reiterate that we will exit Q4 with 10% EBITDA margin.
Absorb as you go.
And peer board cost from an R&D perspective, we will still.
Finish strong in Q4.
Brandon I would only add that enterprise momentum.
<unk> continues Rob you were asking if we should expect more seven figure deals.
We certainly have a incredible.
Incredible names in our pipeline of large deals.
I would caution you not only the fact that this big five.
A deal that we closed was 18 months in the making.
At island gated beyond our initial.
Views and so deals remain elongated and it's hard for us to say on these deals when they will close exactly but in terms of pipeline being there and great companies and enterprises move up market, we're very very excited.
Okay. Thanks for that definitely nice to see the guide not come to see people guidance this quarter.
The you said that their customers are seeing three plus use cases, and then 30% coming from RFP.
And just wanted to.
Dig into that a little bit is that the consolidation of existing customers or is it I think you said.
It was competitive takeaway.
<unk> prepared comments.
Talk about those two items and whether they're connected or whether there is.
The stack consolidation.
Something thats, a big driver of the business and then I'll pass the line.
Yeah, and I'll be speaking a short answer which I believe is now the best of breed out there and if you want to reach from legacy band also.
RSP.
That will be it should be different than that to get to know our best metric.
Your next question will come from Josh Baer at Morgan Stanley . Please go ahead.
Great. Thank you for the question.
Some of your prepared remarks pointed to signs of stabilization.
I guess just wondering if when you think about the growth potential of your company is it fair to say that that you'd hope to reaccelerate growth not looking for specific numbers or timeline, but when you think about your growth profile and a better macro does it is it higher than current levels.
Yes cloud you're speaking.
I am I am.
I love profits because that means that we are running and healthy business.
Justify the fact that debuted with me excuse because makes profit but on the other side. If you say immediate time as CEO , but he's excited with 25% growth no absolutely I wanted to challenge myself.
My team and those of the company to be ambition, because we haven't seen that in a moment.
We have the best of breed, we are penetrating new markets new geographies.
Note that addressable market is crazy I E.
Thank you.
Strategically we are opportunistic we are positioning ourselves towards.
Toward accelerated growth.
The macro environment will be will become friendly again on the other side of the business is incredibly healthy and we love the loyalty business.
Great. That's really helpful and then sort of with that positioning for acceleration and a better environment second part of the question.
Should we expect to see a step back in margins when that time comes too.
Are there investments needed for that Reacceleration in growth or are the resources in position for that opportunity ahead. Thank you.
No.
I think that Brian but angle.
Okay.
Hey, Josh.
Simply positioning.
View ourselves as a rule of $48 million as we see growth reaccelerate, while adjusted EBITDA margins and make sure that we're making the investments that are necessary to continue to operate in the growth. Obviously suite. If you want to reaccelerate growth, we feel that we do have the necessary headcount at the moment.
Keep up with Larry just law of large numbers.
We continually invest in Nevada.
To make sure that we're maintaining sufficient growth rate.
Got it.
Oh, sorry, okay.
Go ahead, Josh I was just going to add Josh that and one of our focuses.
Really is to create continued more efficiency in our sales and marketing machine. We believe that there is more value to extract and.
And that is we're taking specific steps like value engineering and others to achieve better unit economics, both in pipeline and in pharma the execution.
Okay, great. Thank you.
Your next question will come from Kevin Kumar at Goldman Sachs. Please go ahead.
Alright, Thanks for taking my question.
I wanted to ask about the new OEM partnerships great to see.
Just how did their relationships develop and anything you can add in terms of how impactful you expect them to be in terms of contribution over time.
Yes, Kevin.
I believe your first question without correct.
Yeah. Thanks, Thanks for having me.
Welcome.
So although.
I want to I would like to highlight.
Oh, Yes technology works.
Then you can you can enter into the execution path, but getting you need to know that.
The table at Neal.
And OEM technology that meets every vendor from HCM vendor to payroll to ERP and many others.
Easy to integrate with table from two ways. One is we embed the table white label, enabling disabling feature suite.
Giving the OEM partner full control on the.
At the bottom of the distributor Lomax wants to show and what we want to show because different than direct deeper and training models.
Bob is a very sophisticated solution that allows all water.
Pardon data to synchronize the cycle, we did release cycle. So we become part of beam technology software stock and this allows the OEM partner too.
To easily embed the use they're excited to jabil.
From a technology standpoint, we are ready to.
Bond our OEM partnership like.
These are this quarter up and you think you can take.
Yes amazing Thank you Paul.
Yeah. So in terms of the two names that we've shared that would actually one name.
The other one was.
Big four firm.
<unk>.
What I'd like to underscore with regards to Darwin box is that in terms of ramping up timeframe. We should expect this to take about three to four quarters that will essentially allow the company to fully operationalize, our technology and their commercial offering enabling their fee.
<unk> team and effectively starting to produce results that were reflecting the incremental revenues for us.
Additionally on the big.
Big four name.
This is I'm, particularly proud of the fact this is the product of the.
Investments in <unk>.
Our in our channel organization in general maturity in the way, we continue to manage as system integrators.
We believe our technology as closets, Paul just described aligns perfectly with the system integrators goals and similarly, we expect these efforts to produce results over the next few quarters.
Okay.
Great. Thanks, Thanks for the color there.
It sounds like gross retention was fairly stable this quarter.
Just curious on maybe the cross selling motion.
Within the enterprise and maybe in particular shape.
How much is maybe increased conversations around AI, helping maybe drive higher attachment rates there. Thanks for the question.
Okay.
Okay.
Sure So look.
We are extremely focused on growing our base, whether it is upselling or cross selling and both are incredibly incredibly.
Hi priorities in our at least in execution.
You are accurate and correct in saying that the cross selling opportunity is higher on the enterprise side.
And we pay special attention to this so you know even in this quarter, we announced the great results in the expanding our relationship with Vmware.
So yeah, we have a lot of focus on this and we're executing very very specifically.
Thanks for taking me.
Hello, I want to chime in about shape.
J P will my baby.
Actually shape. These are already positioning in the large enterprise needs because we we have been successful on solving big problems with D E.
So I love the automation part.
But the bigger companies have.
You know when you when you automate initially company and you build the content does need to be deployed.
10 languages.
<unk> is an optimization is what that Ben when you need to modify these content and probably did that show $1, one or <unk> zero, what do you mean, the two rate translate everything.
So the advantage of using the Trimble shaping these context, allowing customers to reduce from 40 work could may be.
To like 20 minutes.
The speed of deployment.
Foster.
In multiple languages and diseases.
Enterprise needs are from a productivity standpoint.
We're seeing that in.
Sensibly.
There were 40 days become 20 minutes yet.
To train their people and to distribute content. So this is what the jetblue is already positioning up market and this is because our customers started asking those kind of sophisticated automation that you can achieve only read it yet.
Your next question will come from Stephanie price at CIBC. Please go ahead.
Good morning, I just wanted to follow up on that on the last question just curious to dig a little bit more deeper when customers choose three or more services.
From <unk> what are the biggest drivers there is it typically internal and external use cases or is it different modules in the platform.
And maybe related or are there other areas that customers are asking about that youre looking to add to the platform the comprehensive solution.
Stephanie and good morning.
First of all.
We love talking about the blend of use cases in what are often times, we refer as <unk>, meaning the capability of solving for both internal and external use cases.
In terms of the mix.
We know we like the external business as we've shared the multiple times, because it's very differentiated and yields a better unit economics, and we win at a higher rate in that space. We have competition tends to be more focused on the legacy side.
On solving for internal problems.
Let's say that.
The very frequent use cases that come to that we saw before or on the onboarding side and professional education side, but also there is an uptick in on the sales enablement side.
Even with very large organization.
Which we are very excited about and acquisitions like the one way to go we will further strengthen our positioning in some of those capabilities.
On the external side similarly, the move at all.
Increasing our capabilities also thanks to technology like Dearborn is to really strengthen our capabilities on the customer education site.
And the notable we know that we have mentioned that I would say the disability to solve before hum sales enablement and external facing capabilities has been probably from a differentiating standpoint. The one element that has led us to winning this very large deal.
That's great color, thanks, and maybe related to San you mentioned as you go there obviously, it's been a.
Get more acquisitive than usual lately with it you go in and pure Board just curious if you could talk a little bit about the M&A environment what.
Are you seeing in the market here.
Yes, absolutely it will before I pass M&A to cloud you know one thing that I that I.
For golf and want to make sure to address.
If any is that.
One of the things that we can see that our most strategically about the blend of use cases is not all in the acquisitions side, but it's also on the retention side, we see unit economics of excellence the top quartile when customers use the table for more than the three use cases, and so we don't just think about it in the context of.
The winning at a higher rate debt, but it also retaining an.
An increasing lifetime value.
Claudio Brandon I'll pass you give me any questions.
Yes.
Cloud speaking yeah, so the only one but one and M&A do not make mistakes. So we are very careful on our lives in the market.
All of the fine being the best technologies that can be embedded.
Inside the cable you find that are starting to <unk>.
And complemented the chip offsetting.
The talk regionally at goal.
And acquisition.
And Jack Morton.
Foster inside the chamber using them.
One property.
<unk> language lots of modeling.
And we did well I can provide that we are going to destroy the Iranian content market that is.
'twenty, although maybe possibly with videos because we are building something that finally, we made the move.
Excited with Toledo.
And this is consistent with our ultimate ambition.
About being born.
We have acquired a community system that works very well.
Our tea leaves of external training when you add the customer are causing your bottleneck on academy.
You don't need to train them.
<unk> bottomed out with content, but you want those customer and partner in Iraq and through thoughts on Nuomi and dynamic.
And this is an incredibly consistent on.
<unk> done all the math.
That is a focus on adding features for the <unk> savings.
We are continuously exploring.
The market does.
Tom any angle.
Any angle, but.
We are extremely careful we want to pay a fair price and we have to digest those are positioned.
Onboard people.
Embedded technologies and stuff like that so we are not to make a position just to deploy y to deploy the capital, but we want to digest acquisition and find that ideal opportunities.
Thank you for the color.
Your next question will come from Richard Tse at National Bank Financial. Please go ahead.
Yes, Hi, it's James sitting in for Richard right now.
Good job on the quarter and I was just wondering should we expect R&D as a percentage of revenue to continue moving up.
You guys continue to invest in AI or do you see the partnership with that Big Tech company kind of offsetting those incremental investments.
Hey, its Brian speaking.
You should expect in Q3, R&D will tick up as a percentage of revenue roughly 19%.
Make some incremental investments, but over time that will stabilize.
I expect that R&D will continue to climb as a percentage of revenue, we see kind of 1920 percentage to be the high Mark and then over time, we will gain leverage there as well.
But.
Even even with those investments that we're making we're still we're still very confident that we'll hit our adjusted EBITDA margins of 10% by Q4.
Okay, sorry, one last point is even in R&D as well in Q3, Q4, or we have to make some significant investments et cetera in order to become compliant. So some of those costs as well are impacting our R&D in the next couple of quarters.
Okay, great. Thanks, I'll pass the line.
Your next question will come from Evan Chao at TD Securities. Please go ahead.
Hi, There my question was on the system integrators pipeline I'm just wondering if you could share any details on that on whether we can expect any more big partnerships or even any more big for us.
Alright, well details that perhaps it's hard but I will do my best here I'll, let that we are super excited about our work on our side.
This is a work that has been going on for a wireless I would say I would characterize our working too in two segments segment number one the commercial space.
A deeper relation or in the form of alliance. These are teaming agreements with.
The biggest firms and system integrators in the world and the Great News is that we are developing those relationships to a deeper level than we ever as it and.
I would say.
We then high degree of confidence to the edge, we knocked down that the big five when the when we announced it would probably be in video this will accomplish.
So not only we continue to develop relationship with this big Asahi that lead because that winner, but also we continue to work with the.
The peer group of greater size and not only the big four that are more.
Two to tap into the enterprise market because they are very present.
The second comment is on the government states the government space as we have outlined before is the easy part and Theres that world.
This means not only local partners that play very favorably in the jurisdiction in the states in the cities and the counties.
But more broadly there are certain of size that our practices.
They're a very government focused them and they are raising those organizations.
Since a long time, they have a view they understand all the federal agencies the buy.
And our ability to work closely with them. It gives us not only more credibility and well told and accelerated paths, but what we love is it gives us a longer term view on pipeline of opportunities.
That is very healthy for our IBD can be predictable in the future in the government space.
So our efforts are being coordinated on there are a.
Renewed.
Now you also organization, we've made some investments in terms of people.
And we're extremely excited about it and more news to come.
Okay, great. Thanks for that answer.
My next question is on the in your prepared remarks, you mentioned some churn in the SMB space I was wondering if you could comment on that.
And whether you see it continuing or maybe you're seeing the bulk of the churn happen in that space given the macro.
Okay.
Okay.
We believe that this is very consistent with our strategy and go to market.
Over the past.
Yeah. It was we recognize that.
The SMB logos.
Have less maturity and they tend to churn.
Churn them at a higher rate than enterprise customers and listen.
Listen you know we are focused on building a system that really succeeds in the medium enterprise space.
Now with that said.
With the right level of all the automation the training and skill in Upskilling, we can make successful all system be customers, but we believe that this churn in the lower part of the of the the the the customer base is.
Really by design.
If cloud your brand do you want to add something on this topic.
Nonetheless.
Your next question will come from Martin Toner at ATB capital markets. Please go ahead.
Okay. Thanks, very much for taking my question you guys mentioned churn can you talk a little bit about what the customers that are churning look like and look into your IRR.
And tell us what percentage of that.
Our looks like those customers that are currently true.
Hey, Martin I'll take that.
One thing Richard mentioned is that our gross retention did remained flat quarter over quarter.
Although we see.
Some churn in SMB market, which is high switch America cost conscious so it goes to the lowest price.
Given that our.
Our book of business continues to shift more to the market and enterprise.
The SMB churn com, we are still seeing gross retention remained relatively flat.
And also you know when we look at SMB from gross retention and also expansion opportunities.
F&B is a bit suboptimal, we see most of our expansion on achieving the mid market into the prestige as well.
So we'll continue to adjust.
Customers that are optimal.
Makes sense.
Happy to see that gross retention has remained flat.
Yes.
Great. Thanks, Congrats on the whale.
And also congrats on Rolls Royce announcement can you talk a little bit about the European opportunity.
How's that coming along and how much could it contribute to growth going forward.
Totally that's the that's the market that that as as you know we continue to invest in them with the most recent.
Growth and set up for the dark region.
Winning rolls Royce there in a relatively short timeframe from launching our dock operation was an incredibly encouraging sign and we continue to see a ramp.
A couple of pipeline growth in Europe .
Particularly in the U K, France and Benelux.
As well as a good momentum in pipeline in the APAC region not just in Europe .
We remain focused on launching.
These new if you will entities and focusing on these markets.
But we also recognize that it takes time and and where we're hoping to continue to one now it's a great logos like rolls Royce in the quarters to come.
Just one other point as well with our OEM win with Darwin box, we're also adding Indian market, which we're not in today, so with that OEM play that gives us an access to a market that we're not in today.
That's great. Thank you very much and thank you Lee.
Your next question will come from Christian Squirrel at eight capital. Please go ahead.
Hi, Good morning, I'll ask just one a two part question on a topic cloudy was very passionate about and that is artificial intelligence.
So part one more from a financial perspective.
Would you see that shape is the only product commercialized in market and up sold separately right now and then part two and a little bit more open ended what across the entire portfolio are customers. Most excited about what are you showing them in demos, but give us a little bit of color on what you're working on in AI.
Yes.
Sorry, I got the push by some of the cycles can you repeat the second one please.
Yes, it would be.
There were some references to AI and AR and the release and prepared remarks, but what are you selling to customers. What are you going to customers with just show the power of those AI integrations.
Yeah. So.
About AI.
Hello, everyone.
It's a super easy to build something with new using open API.
<unk> or or others.
So there are a lot of experiments.
Out there to build.
Everything, including the shape like broad answer that.
Ken can be interesting product.
Betsy that we started investing when the I 40 years ago, and what do we have learned is that.
The biggest problem of AI is not creating a nice product.
Bob first of all to make it scalable I mean, you need to build the case out of a median of neural nets and disease.
More complicated than creating it end up being a content generator.
Second you need to be compliant.
Oh, the gastro met our use of data to train your AI. So there is an incredible level of complexity.
And before I start ups.
This level of complexity takes time and being these meantime, we have such a competitive advantage.
Shape, but we've become something else.
So I have the confidence that the shape integrated that we'd done the cable ecosystem.
<unk> will be something that the large enterprises will involve to use.
But by the way.
Right.
We are.
Des Moines.
Our new shape a teacher.
It was by any measure.
In September .
To answer your second question, let me ease of bed Bugs me that inside the technological ecosystems, we do see mainly two main areas one is automation.
Means AI doing some we're looking at he works that now are done by humans like content tagging scheme timings can matching that.
Semantic search suggestion you name it.
And then there is a big part of.
Related to the content what are the general in AI, we were off to an industry that is.
<unk>.
Legacy because his team by the policy would be deals up to to watch.
And you can get to learn something.
Perfect. Thank you very much for taking my question.
Thank you.
There are no further questions. So at this time I will turn the conference back to Claudio for any closing remarks.
Perfect.
Thank you everyone for joining these.
Nicole I think Mike It's Mike two things one you signed the Bronx happy to see you in November speak soon thank you and don't forget to come to inspire.
Okay.
Ladies and gentlemen, this does conclude your conference call for this morning, we would like to thank you all for participating and ask you to please disconnect your lines.
Okay.
Okay.
Okay.
Okay.
Alright.
Okay.
Yeah.