Q1 2024 Docebo Inc Earnings Call

[music].

Good morning, everyone and welcome to the Q1 'twenty 'twenty four earnings call. All participants are currently in listen only mode. We will open the line for a question and answer session momentarily.

Analysts can ask questions by pressing star followed by the number one on your telephone keypad.

You withdraw your question. Please press star one again.

We ask that analysts please limit themselves to two questions and returning to the queue for any follow ups.

I'd now like to turn the call over to the Vice President of Investor Relations, Mike Mccarthy. Please go ahead Mike.

Thank you Bruno last night after market closed <unk> issued its Q1 2024 results. The press release, which included a link to management's prepared remarks and in our quarterly Investor Slide deck was posted to our Investor Relations website.

Mornings call will allow participants to ask questions about our results and.

The written commentary that management provided last evening.

Before we begin this morning's Q&A I would like to remind listeners that certain information discussed may be forward looking in nature such forward looking information reflects the company's current views with respect to future events.

Any information is subject to risks uncertainties and assumptions that could cause actual results to differ materially from those projected in the 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. They are not recognized as measures do not have standardized meanings under <unk> Rs.

Please see our MD&A for additional information regarding our non-GAAP.

<unk> financial measures, including reconciliations to the nearest GAAP.

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 Dr. Cheekbones, ERM CEO, unless you are twofold, and our CFO <unk> <unk>.

Yeah.

At this time, we will open the line for questions.

You have dialed in and would like to ask a question. Please press star followed by the number one to raise your hand and join the queue.

If you would like to withdraw your question simply press Star one again.

You are called upon to ask your question and our listening via a loudspeaker on your device. Please pickup your handset and ensure that your phone is not on mute when asking your question.

Again, we kindly ask that you limit yourself to two questions and re queue for any follow ups.

Our first question today comes from Suzanne Sue Kumar with Stifel. Please go ahead.

Good morning, guys.

<unk>.

Now for my first question I, just wanted to touch on you guys flagged the SMB weakness sitting in their remarks, and but you know from the keep your eyes and results.

Clearly seeing continued strength and momentum in enterprise and and and Green shoots in the government space you know how should we be thinking about the.

The durability of these trends that you're seeing.

Yeah.

Hello can you hear me Hello, Hello, Yep, Yep, you're right now.

Okay, Okay, sorry, sorry.

I'll, let David go ahead.

Hi.

I would say look this is a quarter in which we we thought they are.

For four months.

Underlying and really.

Focus on.

It being another beat on revenue and that'd be down.

And underscore really are solid.

Cash flow performance.

You're correct in terms of the impact from the macro we're seeing a more elevated in the more elevated the past couple of months in the SMB and mid market segment.

Or would it Sharon.

In general seek optimization.

We have more pressure on that in the past.

And.

We expect we expect this to diffuse overtime.

When when you when you combine that with what we shared on the on the large customer impact.

We are.

However, just for clarity.

Estimated that we have supported for over nine years.

I would say that's kind of a little bit of a summary on the performance of the quarter, but all of this is is literally by design in the sense that.

Our enterprise segment, and our golf segment and then.

Very remarkable performance.

Among other things.

Our new logo ACB inquiries that by almost 20%.

Customers that weighs.

$100000 in to get our and above grew over 30% I think over 36%.

Almost 60% of our E. R. R in quarter, one came from the enterprise and government segments.

And then you know 50% of our pipeline now is is enterprise and external hybrid use cases, which by design is what do we want more for better unit economics.

<unk>.

We remain very very optimistic about the trend moving forward on the basis of this Scott anything you want to add.

Yes, no I think this is a good summary, I think in general I would say is that we.

As we look at some of the factors that in.

Providing the guide we are being cautious as we look at some of the macro pressures, especially on the F&B side I would say of course, the FX in the U S dollar movement.

It has an impact.

So I think those revenues into U S dollars and I think at a high level, what's important to understand about the lets you alluded to it that if you. If you read through the plan. This is a solid quarter across the board from a from a revenue EBITA.

<unk> done incredibly well in the enterprise segment and continue to spend some of those numbers that I talked about at the end of the day. The company will still continue to grow as we talked about in our guide and we provided that guide just under 20% and at the same time, increasing our EBITDA and free cash flow. So as we think about the medium to long term.

We are now with the free cash on the EBITDA leverage that.

We are delivering this also gives us.

Firepower to invest in areas of growth and support our build versus buy strategy in terms of innovation and I think the the the most important part even in this operating leverage.

And growth story is that we will continue to invest in research and development.

Innovation and sales and marketing.

Throughout the year.

And I think the leverage that you're seeing now come through the system. It's mostly from G&A. So what that really tells you. Just said we are focused on driving high quality growth with best in class unit economics, and that's a consistent story from the past few quarters.

Yeah.

Great guys. Thank you for that color.

My second question I wanted to touch on the partner channel.

Is oh, you can provide some color on the current to the forest partnership and then and are there any changes that you may have seen an entire relationship since our last update.

And and on the other front and it sounds like you're seeing.

Pretty healthy traction with new partners on both the enterprise and the government side. So it would.

Love your thoughts on some of the puts and takes that you see with the partner channel going forward.

Yeah, I love him Scott I'll get started there feel free to to Chinese.

Look hum.

Speaker Change: Got it.

Speaker Change: And your question regarding day for Sip.

As get aware, we're currently engaged daily auction. So we're unable to make any specific comments about the relationship at this time.

You know Ala.

Ever I would say from our perspective, we remain focused on them.

Hmm Hmm by divesting our R. R.

Our focus we're very focused on them.

Making sure that we have a good differentiation of our about our partnership in terms of revenue and distribution of those are.

In terms of the OEM are booked to in general our execution continues.

We have added them.

<unk> Oems since last summer, which was consistent with our strategy.

With regards to you know top some existing partners E Y and Darwin box in particular continue to scale and.

We expect them to have a healthy performance in the second half of the year.

Additionally, you are correct.

Think about partnerships, we think a lot about.

Beyond the Oems do we think about a size that we think about the broader partnership ecosystem opportunities.

In this regard our ESI focus is very significant we are putting our energies and as you know from a perspective of arrow of improved lender, we want to do even more and even better.

Because we believe it's a very very promising area, where do we have a lot of leverage to gain from.

In this regard we actually staffed our team even further to grow and mature aggregations partnerships OEM about not only are.

We brought on board, a new seasoned executive named Travis Bird, who as a long standing you know great experience in the HTM and space and and would've been leading our partnerships in corpus strategy function.

And yeah, we you know OEM and partnerships in general remain one of our growth.

And our growth pillars and growth vectors.

And we plan to acquire more and continue to partner in and generate more revenue with with the ones that we have already.

Yeah, and the only thing I'll add.

Speaker Change: So then to that point quickly is on the larger side that are ramping that are important to the what we delivered this quarter and in the future.

Speaker Change: We spoke about.

They're they have.

Have continuously supported us in a number of deals in the past and government being one that we called out but I think beyond government. We're certainly seeing that even in the commercial segment. Our enterprise segment I should say they are ramping up significantly to larger size specifically.

That we work with and I think one of the things I would call out as part of my guidance in General is that you have some healthy opportunity that are in play.

We are being cautious in terms of how the timing of the deals will will play out and when they will close but we are vendor of choice and a number of these deals working with some larger size.

Speaker Change: And that's an important part of how we.

I attribute our.

Speaker Change: So as to attribute a significant amount of our pipeline as we look forward to the growth of the company.

Great.

Thank you for that for that color Jen South asked a lot.

Thank you. Our next question comes from Ryan Macdonald with Needham. Please go ahead.

Alright, Thanks for taking my questions and congrats on a nice quarter.

First to start with your CCAR and.

First of all thanks for sort of our full year guidance I think that helps provide some additional context.

See things playing out through the through the end of the year here, but as we think about the headwinds that you've called out across FX SMB and then obviously the unexpected customer churn can you maybe help us frame up maybe the magnitude of impact across all three of those in.

Terms of where the initial annual guidance is relative to maybe where consensus it was prior to that.

Yes, Brian Good question I think if you just just to simplify the answer which you'll be able to calculate it.

If you look at where the consensus was versus where we guided to the range.

The range high end of the range Steven.

The differential will be basically one third one third one third between each of these components and so.

What I will speak to just in terms of the macro specifically I want to call out in the SMB side is that the this that we've called out in the past. The fact that this is a customer that's a first time buyer macro sensitive requires resources from an implementation perspective, and I know unless he will speak to in a second round some of the initiatives that were.

Speaker Change: To streamline.

And that segment, but I think what we're certainly seeing is that that that SMB customer has more impact in the past couple of months with some of the macro pressures that they're seeing and what we're seeing.

Speaker Change: A bit more on that within our churn, but all on the downgrade side will seed optimization is happening in that segment.

And so as we look through the.

The macro towards the later part of this year, we think.

We were just being cautious to make sure that we have.

Pass through we have taught us aren't whereby behalf.

Enough visibility at least for the.

For the remaining part of the year to be cautious around that segment and then the FX headwind that you know, it's 40% of our revenue comes from.

Outside the U S U S and that certainly has an impact with the U S dollar strengthening this large customer.

Oh.

One thing that's worth noting is that the large customer that we support over nine years, we are still going to support them from one of the one of their use cases, the proportion that divested went to a company that had an in house.

Our content business and has all the mess that they did.

All of this happened suddenly but.

What happens in our world is that because the numbers are relatively you know we're not at the scale, but these these type of.

Downgrades will impact us towards the latter part of this year, just because of our size and scale that impacts growth.

In the year so to answer your question.

F&B macro pressure and then the large customer impact.

You can basically attribute one third one third one third impact from yes from the differential from the consensus to what we guided.

Super helpful color there really appreciate it maybe wanted to just switch gears to the new pricing strategy that you talked about in the prepared remarks and it sounds like you've got three new pricing tiers can you can you provide to the extent you are able to at this point a bit more color on sort of what those three tiers entail relative or compared to sort of the the prior price.

<unk> strategy in it.

Depending on how long you've been in the market.

With this strategy so far any any feedback on from customers. Thus far or are you able to measure sort of or quantify what the impact is on what a new land looks like under this pricing strategy relative to the prior one thank you.

Speaker Change: Yeah.

Yes, so yes, so just to kind of give some background on the pricing the way.

Historically.

That would be priced or our go to from a customer perspective, we would price historically.

As we say Ala carte basis, where there are a number of products and modules that would offer to the customer and the <unk>.

Done a lot of work over the last 12 to 18 months in terms of reviewing.

Our customer interact with what the market is a lot of benchmarking a lot of competitive intelligence and to really understand how we can help.

Customers.

Based on their needs and specifically the pricing is focused.

In the world of what we call offering our core platform and then solving their problems around the specific needs their use cases, and so what you will find here is that our pricing is now moved to more of a core platform that bundles key products and services that we know the customer requires and separated between you know.

Speaker Change: I will call SMB customer versus mid market enterprise customers and then beyond that what we do is.

Beyond the core package the customer will have now capability of <unk>.

Adding incremental use case specific needs, whether its e-commerce capabilities, whether its content offering and capabilities, whether it's you know if you have an external extended enterprise.

Need for having dedicated architecture, so on and so forth and so we've created incremental packages that the customer can benefit from by acquiring that beyond the core offering but even in the core offering and what we've been able to do is to package more product and features and capabilities and all of this effectively will help us from.

Our ability to how we talk to the customers how we solve their problems.

And and more so you know.

We expect that this will help from a deal velocity and win rate perspective, as a conversation and how we've approached the customer from a go to market perspective.

It will be much much simpler.

Relative to what it was historically, an ala carte basis, and and I think one thing that I would call out as you know Ryan.

I also was listening to how hotspot had done it recently.

These things take time right. So with the new customers you can imagine that this new pricing went live in April. These quotes when these are there any new net new quotes that are being created you can expect that they will start impacting us in Q4 of this year because thats like three to six month deal cycles for our mid market and then on the renewal.

The book of business, we will be extremely sensitive.

It's a longer journey, you have to make sure that each and every customer and we had the previous turns and previous pricing and you make sure that you can move them into the new book of pricing will generally take a few years.

As they kind of renewed through the cycle Alexia I don't want to I don't know if you want to add anything to that.

Just a couple of things I would say this pricing exercise.

Re redesign.

It was a was a process that we took our time to define I think our starting point was really to introduce pricing concepts that lineup with our buyers buy and be less if you will company centric, but more customer centric in our line and reduce friction in the in the cycle.

Because we are a story of segments.

Where different buying behaviors aspen across different segments, we felt that it was appropriate to that.

Brokerage time to introduce that pricing and packaging the better reflected the difficult to market story.

As opposed to an Ala carte that there wasn't you know took and created the deal slow down as opposed to this one we our anticipation is we will have better deal velocity, that's one of the goals.

And the second concept.

I think as.

As we plan on releasing more capabilities in the near future. This pricing supports that as opposed to adding more ala carte. It in a manner that could cause confusion, we wanted to streamline the packaging of our future products as well so that our customer.

Better understand them and we can position them in the right segments in the right way so all in all.

Speaker Change: Aerie happy of the job done so far but it's a little early to make statements or.

Speaker Change: No analysis like Karen said, but over the next few months, we're going to start to see the benefit of this and we have great conviction in our pricing exercise.

Speaker Change: Thanks, a lot I appreciate the color.

Our next question comes from Stephanie price with CIBC. Please go ahead.

Hi, good morning.

Hum.

Focusing on the large S. I you mentioned that they were staying open up opportunity outside the government sector. Just hoping you can talk a little bit about what youre seeing with ESI outside of government and how youre kind of thinking that that segment over time.

Sure Stephanie.

Stephanie: Great question, yes, the the the Asahi emotion is one that.

Stephanie: Supports well we started focusing on it in the beginning on that as a reflection of certain strategic deals.

That happened in corporate and then as we started executing in the government space and circular relationship with certain sizes.

<unk> now those same relationships as sort of stick cascaded on the corporate side.

And.

You know what we're seeing again.

Is.

Definitely support better support of larger customers.

We're seeing ESI is very interested in working with us in.

Implementing services.

On top of these customers and in general you know contributing to that pipeline to our pipeline.

I would say.

Over time this is a great opportunity at this point I would say our efforts.

Started relatively.

Over the past few months and we now have a new executive owner of dysfunction that as many years of experience in growing their large scale psi programs.

I believe that we've done really well that we can do even better we were.

So Carlos said it before we have some significant opportunities insight to where we want to be cautious because this is a.

Complex market, which is <unk>.

Not always predictable as to the exact month as to when these large opportunities may come to fruition.

Stephanie: But these opportunities are in play thanks to these assays and.

Our job is to continue expanding those relationships and in growing the portfolio. These exercise. We currently work with a couple of very closely and we have a few others that we are developing.

And I think the only thing that I did that is that.

One of the interesting dynamic is also that you may have heard we talked about in the past few quarters is.

From a competitive landscape as well, we're seeing that some of these larger size are moving to the best in brief top one client with Jabil.

Relative to the historical or legacy platforms that we.

We compete with so there is also a momentum from that perspective that customers are looking to the best in breed technologies and now these larger sites are seeing that we are participating with us relative to the historical competitors that have legacy platforms.

Thanks, that's good color and then and then just my second question I was hoping you could talk a little bit more about the macro headwinds that you're seeing impact.

Customers seats in renewables.

I'm a bit surprised that you werent seeing at the enterprise level, just given what some other.

Other software companies are saying, maybe you can talk a bit about your visibility into enterprises, and what you're seeing more specifically there in terms of in terms of customer cost efficiencies et cetera.

Yeah, no. It's a good question for Stephanie.

In our world when you think about SMB mid market or enterprise, what you'll find is that mid market enterprise segments are more hybrid external leading and so you generally what you find there is that.

We have more departments to serve more use cases to solve so our ability to retain our expand those customers is in a much superior position relative to the SMB customer who is a first time adopter one final LMS buyer would not a strategic don't happen necessarily have strategic resources.

And to their use cases or use case in general the SMB customer may or may not be.

With multiple use case opportunity for us and so that's where the <unk> optimization and any of the impact youre seeing from the macro.

Is more felt because we know because you have.

In the enterprise segment, and our ability to retain and multiple use cases or expand and so that's kind of already meet the dynamic and why we've been calling out in the past year or so our focus to continue to move upmarket and support you saw this quarter Leslie spoke about at the start of the call you know new logos ACB increase.

On a year by almost 20%.

A good majority of that is coming from mid market enterprise segment and government customers over $100000 and above grew 36% year over year, 50% of the number we delivered in the quarter came from enterprise and government segment. So if you look at some of those critical data points, you'll realize that the underneath.

All the all the customer cohorts that we support it's really the mid market enterprise customer that gives us the best in class unit economics relative to the SMB customer.

And we have we have some plays in terms of how we will support the SMB customers told without.

By optimizing some of our operating structure, but generally that's how we think about the strategy going forward.

That's great color. Thank you.

Our next question comes from Josh Baer with Morgan Stanley. Please go ahead.

Great. Thanks for the question a couple of follow ups on some of the headwinds for this year.

Just wondering if there's any theme or pattern to some of the optimizations that you're seeing in SMB and lower mid market.

You know, whether it's departments or cross use cases is internal external thanks.

Yes, Josh I'll continue I'll, let you.

Go ahead go ahead, sorry go ahead quickly.

Yeah, I think I think it's a little bit of a continuation of what our.

So Karen was was addressing before Josh.

What we're seeing is you know.

Smaller organizations, where.

Hum learning.

Was not.

More integrated in a more complex complex ecosystem.

We're learning.

This strategic.

They may reduce the seats or altogether.

Leave it for.

Different ways of delivering.

Content I would say.

Our focus has always been working with organizations that.

Use the cebula for what it's great for into Cebula, our positioning in the market more and more we want to.

Our right to win is with organizations that executing the multi use case strategy.

We have a great penetration with customers that are new vegetable for at least two three and four use cases, that's where best unit economics are and I would say organization, especially sub thousand employees.

That as a point to need and smaller use case or the ones, where we have seen the biggest patterns.

I don't know if theres anything else you would add.

No I think I think Josh the only thing I'll add is to your question on the use case, specifically I think.

The majority or the majority of the significant amount of the pressure that we're seeing on the <unk> on the internal use case market.

And so that's that's kind of relative to also where folks are optimizing their head counts in the companies.

Petra.

Okay great.

Second question just on the strong free cash flow.

And the margin there 18%.

Anything one time in the quarter should we expect free cash flow margin to track ahead of of EBITA margin for the rest of the year, how should we think about that sustainability of that free cash flow margin.

Yes.

No.

If you look at the EBITDA.

Guide that we gave to get high end of the range of 15, 5% generally I would say free cash flow.

Looking at our trailing 12 month basis, which would be one or 2% higher relative to our EBITDA, that's kind of the rule of thumb in our world and to your question. If there is any specific items in Q1, not necessarily that just always.

Payments with some customers in the billing cycles with annual cycles that we would have collected some cash but even on a trailing 12 month basis Joshua <unk>.

Safe to presume that our free cash flow will be 1% to 2% higher than what we guided for EBITDA.

Okay, great. Thank you.

Our next question comes from Robert Young with Canaccord Genuity. Please go ahead.

Hi, good morning.

Some of your past comments suggest that you want to operate the business at a rule of four year better kind of with an emphasis on growth and so does the annual guide for 24 suggests that the emphasis is more on EBITDA margins.

And so I was curious if you could.

Maybe.

Revisit that.

That target and then if you could also talk about your aspiration for annual growth over time. Some of the things you are calling out here driving this change seem to be.

Depending on your view could be temporary in nature, and so if youre looking out over a three year horizon.

Are you still looking at building this business for like a 20% or higher growth profile or maybe if you can just talk about your aspirations long term.

Yes, Rob I'll start with <unk>.

I'll start with your specific question on the margin and then I'll give I'll, let him to speak about the long term strategy.

Speaker Change: Firstly first and foremost the operating leverage that youre seeing.

<unk> that we delivered this quarter and we will continue to deliver a part of my guidance is that.

We are focused on driving growth as the primary.

Objective of our strategy and high quality growth with best in class unit economics being underscored in that statement.

If you look at the delivery of the operating leverage we've done over the past few quarters I would say this.

DNA is the gift that keeps giving and will continue to we will continue to show operating discipline and our G&A functions, which is where youre seeing the majority of this leverage come from we will continue to invest sales and marketing in R&D at levels.

You can expect sales and marketing will be relatively flat.

Two what we ask that right now around 32% give or take and we will continue to invest in R&D and innovation, which was supposed to I think 20% as a percentage of revenue this quarter will be slightly lower than that but what I'm trying to get to is that we are not going to compromise investments in sales and marketing in RMB and growth remains our primary objective.

Yes.

And as you think about the growth of the business still.

We delivered this quarter at 23% the natural operating leverage from G&A will get us to a position where this company.

As we look through 'twenty four 'twenty five cycle is more of a balanced rule of 40, where EBITDA free cash flow naturally is getting to closer and closer to the 20% Mark and I will let I'll, let you come in on the on the growth side, but like I said, we are focused on driving our rule of 40 with balance growth.

And balanced EBITDA.

No look our Robert Great question, and thanks for Karen I think I think we.

Our thesis is looked out and said all we remain extremely focused on growth doesn't change the investments in sales and marketing investment on product.

The reflection of that thesis.

Hum altogether.

There is a tremendous opportunity because in the industrial market times.

It gives you an opportunity to create it.

Improvements are even further to execution and we're we're very focused on that you know we're turning it on.

Our attention more and more and more on an existing account and so from a pipeline standpoint.

We lull, but what we're seeing there in terms of our ability to generate pipeline within our base that we've been focusing on that a lot because it generates a really healthy pie.

Pipeline relative to tax.

Our long term plans.

Mentioning are supported by investments in products.

And in.

In 2024 alone in H, two we're going to be releasing.

Multiple modules that we are modeling contributing to our growth in the future.

Communities are altering our insights capabilities.

So so our thesis of growth is the is unchanged.

We're very focused on executing across the border on the gross supply line side of the business and on the product side of the business and on improving our <unk>.

Internal functions.

In order to really get the best out of every single unit economics.

Okay.

Helpful and maybe if I could just.

Just dig into a little bit on your answer there alexia with them.

Alexia: Yeah, what are the elements that we might think of as excluded from the current guidance like the multi module is the product release, the pricing changes large deals fed ramp.

It might be helpful. If you could call out some of the things that might be upside to the guidance, you're giving here that youre not concerned because maybe they're too hard to understand or too hard to time, and then I'll pass the line.

For sure Rob I'll take that one.

I think the way to think about our guide is.

I've said this in the past.

We generally as we as we're building an anchor a healthy pipeline with these larger size. There are a number of deals that are large where we are.

In a good position, but it is.

As we are as we've always said on large.

Deals, we generally tend to stay cautious and putting that in our.

In our overall thought of growth because we want to see execution and get very close to the finish line and as you know a large enterprise deals take time and it matters.

Easy to pinpoint witching back months boson, sometimes and so that's one factor I would say that 2024.

Typically also the pricing changes are or are not going to materially impact 2024. They are more geared towards 2025, as we think about.

New pricing that came into play entity at six three to six months.

The sales cycle on net new deals that are coming through from April onwards will mean that youre not going to see the benefit of it necessarily until late 'twenty early 'twenty five.

And I think in.

Alexia: And the other one item that I would say that on the government side. Similarly on any large opportunities are opportunities, we will have subject to our fed ramp certification.

We're also more of a 2025 there may be some benefit in 'twenty four but we are generally cautious in calling out large deals until we feel very certain on the timing of the closure.

And Thats really basically I would say is some of the.

Upside that may be there, but I think more importantly, I think we're looking to.

More of a 12 to 18 month cycle.

Just re accelerating some of the initiatives that may help from a growth perspective, including the product initiatives that I'll. Let you talked about that we have a number of products that are going to start rolling out in Q3, Q4, and you can expect that that's more of a benefit into 'twenty five cycle.

Okay.

Yeah.

Our next question comes from Richard Tse with National Bank. Please go ahead.

Yes. Thank you it seems like the business is beings or deemphasize, a little bit on SMB, whether its natural or intentional. So how should we think about the mix of SMB.

SMB to enterprise on air as we sort of look forward over the next call. It 12 to 24 months.

Okay.

Okay.

Well rich.

Richard.

Our focus.

For quite a while has been on the media enterprises enterprises, meaning.

Mid market organizations.

Above 1000 employees for sure the environment and what we're communicating is that we're seeing more pressure in the SMB segment, which coincides also within areas.

Less a focus for us.

From an <unk> standpoint, I think what you can expect is that the company will perform will continue to perform better on the on the enterprise side of the house and we the deals.

The 100 K are continuing to track along there are we have that in this quarter and this quarter I think we again as we said.

Almost 50% of our E. R. In the quarter came from the enterprise and government segments.

And our customers.

Customers with the 100, K and above and here are.

They grew 36% year over year. So our goal is to continue on those trends.

And we are running the business.

In that direction.

Yeah.

Speaker Change: Okay, and then with respect to government, you're already having a tremendous amount of momentum there in that business and it sort of continues on what you talked about at your conference last year. So when you do get that fed ramp certification should we expect a sort of further acceleration or is that just momentum kind of falling.

Along the path of kind of under the assumption that youre going to get that fairly soon.

Yes.

Our our golf business is exciting.

And the and very promising it's not just very promising it's already been delivering significantly in quarter, one and this.

Speaker Change: As a reminder.

Relatively new initiative for the chair, but we haven't been doing the government business. Our focus 40 years with that said, we look at the government opportunity as we have commented in the past in two tranches as you.

Correct outlined one that we're executing on that right now the state local education or sleds and did this federal which we currently are not in the deals yet because of fed ramp certification, which we're pursuing and talking to agencies about.

Speaker Change: It's a it's arps rather tomorrow.

Something before updating the certification we can certainly expect that once we will have this certification and we will start to see a trend of the winning deals.

In exploration is conceivable, but we can't forecast something that we don't have yet with that in mind and the reason why we're working very hard in that direction is that is that because we have the big.

Big objectives in that area, but in the meantime, I want to underscore how the size of deals and has led to is also growing significantly and are working with partners and distributors like Akira softer is team.

<unk> <unk>.

Significant dividends in a relatively short timeframe.

And the only thing Richard I'll add to that.

<unk> spoken about this segment.

We were we were deliberate as well in regards to when we talked about it in 'twenty late 'twenty two early 'twenty three our investments in and government. This is a segment or vertical level call. It that has more resiliency in different macro environments and generally tends to do well are more consistently so.

We're also mindful that as we looked at <unk> and 'twenty three.

Speaker Change: Relative to some of the macro pressures you talked about SMB government segment is important to us even in the future because it provides us.

Healthy growth opportunities and consistent revenue.

Speaker Change: For a long long period in high quality revenue.

Okay. Thanks, guys I appreciate it.

Our next question comes thank you Daniel Chan with TD Cowen. Please go ahead.

Daniel Chan: Hi, good morning, just digging in on that fed ramp what's left to do to get that fed ramp certification and any update on the timeline there.

Daniel Chan:

Daniel Chan: So there is a.

It's certainly a very complex project.

Project in itself, we have done a lot of work internally on the controls.

Side of the house, we have.

Committed resources to doing this then.

In terms of the material steps, we're talking to them to sponsors.

Achieving fed ramp through our sponsor.

Our preferred pathway that are pathways that also are available without sponsors that are slightly harder.

But you know.

In short in summary, our plan is on track, it's subject to more audit type work.

And.

Identifying the agency, which will invest in resources with us to effectively do this through and act as a sponsor.

So.

We're full on it and I'm pretty excited about the progress so far.

Thanks, that's occurring you talked about the free cash flow margin moving up nicely. You also renewed the CIB. So just wondering what your priorities are for capital deployment.

Yes, I mean, I'll, let you feel free to jump in I'll, just say that we are showing.

Reasonably good EBITDA and free cash flow performance and consistent performance as I spoke as I spoke earlier and if you look at the EBITDA Guide is at the high end the range of 15, 5% for full year, which obviously means that exiting Q4 2020.

For EBITDA will be higher and probably getting closer and closer to the 20% Mark which also is a what I what I'm speaking to that is also guide you to the fact that our free cash flow generally in one or 2% higher than that.

The good good what I like about our setup is that we are generating significant amount of free cash flow to give us the ability to invest in areas, which are like Leslie to speak on but in areas that will whether we want to invest in fed from internal innovation or build versus buy opportunities.

Generally we will take priority.

Our kind of strategy going forward, but having an NCI.

As the renewal of our NCI view that was already in play.

If more relative to we want to have that flexibility.

We deem necessary, but generally I would say that the investments in growth initiatives organically.

Daniel Chan: Organic.

As more and more strategically important to us, let's see I don't know if you want to comment on that.

No.

Speaker Change: Thank you.

Thank you.

Our next question comes from Kevin Kumar with Goldman Sachs. Please go ahead.

Hi, Thanks for taking my question.

Wanted to ask about the enterprise customer that divested where theyre using don't trigger for multiple use cases in terms of external or internal.

I think you've touched on this a bit just for clarification.

How are they replacing that loss functionality.

Yes, yes.

Kevin.

<unk>.

Customer that.

Downgraded.

Was a customer that we have on boarded about.

About nine years ago.

That adds a complex set of use cases, both internal and external.

Now this organization.

Divested a significant part of the company.

And the acquirer of that technology.

That was primarily in the content business also.

Was was the owner of a proprietary.

Speaker Change: Like the.

Delivery technology.

And so what the with the new NTT decided to do was to pretty simply.

Leverage their own existing technology in.

Instead of the <unk> for those specific use cases and in that part of that the data not the debt acquired that did not get divested.

Continuing to the schedule now.

I would like to underscore a couple of things of this experience at number one I think a customer of this magnitude and complexity.

Hammond Straits that.

We kept them very happy and satisfied for almost 10 years and to me that's a testament to our capabilities to execute that complexity and extended enterprise and internal hybrid.

Secondly, and quite importantly, we learned a lot. We we were able to extract a lot of value out of the experience related to this customer and we re leverage this experience across multiple current costs. So look at we wished it stayed with US for the next 10 years again, absolutely, but we.

We understand you know there is.

A nine year lifetime value is not bad.

And.

Speaker Change: We certainly understand the customer that gets acquired by somebody that has its own them.

Technology that want to use their own technology now.

Who knows maybe they will realize that their technology is not as good as ours and it will come back and we'll try every possible angle, but that's those are the facts.

And I think the only thing I'll add here is that this customer still still remains a customer outside of the divested portion and there is still a meaningful customer to us and we will continue to work in.

And expanding our capabilities with them. So the portion that remains with them is still material and we are very thankful for this desperate for over the years.

They supported us.

Understood. That's helpful. And then I wanted to ask about maybe an update on the cross selling motion and how thats trending shape continues to see some functionality improvements. So curious kind of how the messaging on that solution is resonating with customers as well. Thank you.

Yeah.

So, let's say I would I would address the question in two different ways from the perspective of our engine.

Of.

Growing.

Our customer base.

In terms of pipeline.

We're extremely focused on it I mentioned that before what we have done in specifically in that area is we have increased our investments.

Indeed.

So called account development area, we have dedicated more resources into.

Perspective, respecting and debates.

With the goal of generating more upsell and cross sell pipeline.

Of course.

In order to generate more upsell or cross sell pipeline you need to address.

Means that that are uncovered.

And we are leveraging our existing and new products our newer modules.

And as we release new ones over the next few months.

We're building the engine to support the penetration of those new products such as our communities.

You mentioned shape, but we're extremely focused on the operating component of shape and.

AI offering component to this very important.

Speaker Change: To us and to our customers and we get a lot of demand for it.

And insights our analytics products upcoming.

And one thing that we haven't touched on is the concept of extensions that were working on.

In order to differentiate the table even mora.

From the LMS point solutions, so our work on strengthening our in the days.

Our BD engine is not only to obtain results in Italy, but also propaedeutic to the launch of the new products.

Yes. Thank you so much I appreciate it.

And our next question comes from Christian <unk> with eight capital. Please go ahead.

Yes.

Christian: Hi, Good morning, I wanted to ask on the mix of business across.

New logo activity versus expansion activity.

Selling more across existing clients would you say in Q1.

Maybe some warm expansion activity than normal in this environment and I don't know how you think of your pipeline, but could you comment on how thats balance again between new logos.

And some predictable upsell and cross sell.

Yes, yes, Christian I'll start with that so yes, generally I would say that our expansion business and new business.

From a segmentation perspective as focus similarly in terms of mid market enterprise customers right. So as I spoke earlier, if you think about mid market large enterprise customers generally supporting customers with 234 or more use cases, the only really possible at the mid market enterprise customers, which have at least 1000 or more employees and.

Their organization that fits and Thats. The benchmark just my internal use case perspective, but also the size of the company that reflects the ability to support them, whether it's custom education partner education, Onboarding compliance, but then revenue enablement sales enablement. So for us to serve these multiple departments where are those cable was the one platform that solves multiple departments.

<unk> without each of these departments interacting with them in on a daily basis that realistically is.

Where why we cannot continue to articulate our focus on mid market and large enterprise because that is really where you can do that so I.

I would say that to your question around segment, even on expansion. It's exactly the same story right. If we think about cross sell or up sell opportunities from a use case basis perspective.

That those are the type of customers, where we can focus and do that.

And it makes us much much more stickier as you can imagine in those segments.

And.

It's as we as we look forward as well.

The other area that we look at cross sell is wherever you are entities, where instead of department they have multiple.

Multiple <unk>.

U S leased to Amazon logistics.

It's kind of the examples we look out to win from unrelated.

Our subsidiaries are departments that are not just just supporting HR sales, but we're also trying to win customers across the multitude of the portfolio. So we go about that in multiple ways, but I would say that generally.

It is a mid market large enterprise play, where we can expand both on a bolt on current based on our new base on the onset with multiple use cases.

Okay, Great and then for my second question.

Services revenue I think Chuck talk a little bit higher than your own expectations in the quarter.

I'm wondering if there's anything you'd call out there and any change to the longer term subscription.

Chuck: Services mix that you guys are targeting.

Yeah I'll I'll.

I'll take that as well so basically the way to think about services in Q1 is a bit of a reflection on Q4. So we had a strong Q4 quarter. So as you look to implement those customers.

In the first quarter of 2024, you will see higher revenue. The reason, it's also higher to our expectations is that what we're also seeing with our customers as part of our.

Value added services.

And white glove services that customers are looking for us to support them in beyond just the Onboarding, we are helping them in a number of ways.

Whether it's just doing.

Not customizing anything, but customizing the needs of their use case and helping them in that journey and so we're more hands on deck as what happened as well in Q1, and I think that is kind of what the less you spoke about around some of the extensions and being.

Chuck: The one place where our customers feel like we can support therefore, the end to end journey.

And so on the large customers. We certainly see saw that will play out in Q1, but but at a high level services from Q4 Q4 implementation has a higher impact of services in Q1, some additional services that we're providing to large enterprise customers and as you think about.

Q2, I would say, it's probably going to be in line or slightly higher than prior year.

Yes.

That's great context, thanks for taking my questions.

Your next question comes from Kevin Krishna Rhatany with Scotiabank. Please go ahead.

Hey, Hey, good morning, just one for me when I look historically through 'twenty, one and then enter into early 'twenty. Two there were a lot of local ads and then I know you've got three year contracts. So I think these are the ones that are probably coming up for renewal now can you confirm that.

Where a lot of those logo adds that SMB.

Back then how to think about that and just confirm to you that the sort of seat optimizations that youre seeing that youre, calling out an SMB that you're not necessarily seeing that an enterprise I just wanted to get an understanding of your visibility on some of the renewals from that strengthen local ads for about three years ago.

Yeah, Kevin I'll take that so.

The way.

The way to think about in terms of the segment differential is that in the mid market to enterprise segments, where we are supporting multiple use cases.

If it's primarily supporting an internal use case and the company is going through head count optimizations themselves, we may see impact there, but there we do continuously work as we spoke about on the previous question in our ability to expand in multiple departments and so if I'm in multiple departments, especially external use case departments.

We tend to do a much better in terms of expansion and retention and then if it is just purely internal used case.

That tends to compound.

A bit more in the SMB segment.

Is that if its internal use case than the customer in the SMB segment, specifically budget sensitive is a strategic or not for their business.

Plays out a bit more and thats where were seeing more of a.

More seed optimization, where we also don't necessarily have the opportunity to go out and win or expand into different departments, just because of the size of those customers and the complexity of the customers and so that's kind of how we.

Kind of work through the cohorts of our customers I would say that the comment around the multiyear and how many SMB customers. We had in 2020 'twenty one era I would say roughly 25% to 30% of our book of business still is F&B. So as we move through the cycle in the next few years.

I would say that you can expect that that continues to as the enterprise book moves moves up that will start continue to move as a percentage lower and then I think we are also doing certain things in that regard in terms of our offering with the new pricing we've had a very nuanced.

<unk> pricing towards that type of customer and the support we give them to.

To simplify and also improve our operating leverage in terms of how much do you want to spend to support that customer.

Great. Thanks, a lot just a real quick quick one I know your <unk> in the quarter was 22% companywide, but any way to think about what enterprise are our growth looks like.

Let me yes.

I don't have at the top of my head, but I would just say one word and one number that 50% of the number that came from this quarter with some enterprise and Gov.

Okay. Thank you I'll follow up off line I'll pass the line. Thank you.

Thanks.

This will conclude the question and answer session on today's call I will now.

I'll turn it back over to Atlassian.

For any closing remarks.

Well, thanks, everyone and thanks for attending thanks for your.

Very good questions and we are super excited going into next quarter about our continued execution. We believe we have an amazing business.

We are very focused on our long term success. Thanks.

Thanks, again and see you next quarter.

Speaker Change: This concludes today's conference call. Thank you for your participation you may now disconnect.

[music].

Okay.

[music].

Yeah.

[music].