Docebo Inc.: Resilient in a weak economic environment
Docebo Inc. (NASDAQ: DCBO) recently released its third quarter results, and the report showed the company remains resilient in a challenging environment.
The company has, based on its stock price, struggled for just over a year once it hit just over $92.00 per share in mid-September 2021, before beginning a descent to a 52-week low of $23.40 per share. Since mid-June 2022, DCBO has been trading in a range of approximately $25.00 per share to $32.00 per share, with a brief move above from August 1, 2022 through August 15, 2022.
As it continues to trade in a consolidated fashion, it appears the market has priced in much of the company’s performance in the near term, as it waits to see what impact the likely deterioration in economic conditions may have on the company.
While acknowledging some headwinds, management believes that headwinds will more than offset headwinds in the future. Under current macro conditions, this suggests to me that the company could grow at a gradual pace until it improves, although its stock price could underperform if economic sentiment remains subdued.
In this article, we’ll look at its recent earnings report and some of the factors that will drive the company’s growth going forward, albeit at a moderate pace.
Third quarter revenue was $37.00 million, up 37% year-over-year.
Of that amount, $34.3 million represented subscription revenue, which was also up 37% from the same reporting period last year.
Gross profit for the quarter was $29.8 million, a 39% gain from the third quarter of 2021, or 81% of revenue.
Net income was $10.3 million, or $0.31 per share, compared to $0.7 million, or $0.02 per share last year in the third quarter.
At the end of the third quarter, recurring revenue was $144.6 million, up $41.1 million from $103.5 million in recurring revenue in the third quarter of 2021.
Adjusted EBITDA was slightly positive at $0.6 million, an improvement from the adjusted EBITDA loss of $2.0 million year over year.
Free cash flow was positive at $0.06 million, a gain from negative $1.0 million in the third quarter of last year.
It was a good performance considering the difficult environment in which the company operated.
Customer Growth and ACV
A big part of the headwinds the company is facing, which I think will more than offset the headwinds, is the number of big wins it had in the quarter.
First, I want to mention the overall improvement in its customer base, which went from 2,636 customers in Q3 2021 to 3,245 in Q3 2022.
Moreover, its average contract value (‘ACV’) also improved a lot during the quarter, from $39,275 in the third quarter of 2021 to $44,561 in the third quarter of 2022.
A major contributor to sustainable future growth according to management will be an increase in multi-case uses for individual businesses.
New wins were a key driver of the company’s performance, and a major win was Sonos, “the inventor of multi-room wireless home audio”. This is a good example of a business with multiple use cases, such as channel training, sales compliance, customer training, onboarding, and retail/franchise training.
Another big win was Orangetheory Fitness, which has over 1,400 studios around the world. It also offers multi-use cases for channel training, compliance training, and onboarding.
Holland and Barrett
Another big customer is Holland and Barrett, which is the EU’s largest health and wellness company with over 1,600 stores in 18 countries.
Its goal is to provide immersive learning.
Advance Auto Parts, Inc.
Advance Auto Parts, Inc. is a large supplier of auto replacement parts for DIYers and professional customers, and it also offers multi-use cases including compliance training, leadership training, onboarding, professional development and sales enablement.
The overall importance of these wins is not just to get another customer, but to attract customers who have multipurpose demands. To date, management says about 50% of their customer base has 3 or more use cases. Factoring in class growth retention and net retention, companies with multi-use cases account for more than 120%. For this reason, a priority of its capital expenditures will be in areas that “create a strong correlation between the needs of the use cases and the Docebo platform”.
Packaging use cases as a suite and offering it as a solution to its customers generates the results they are looking for.
Geographically, the North American market remains the primary market for DCBO, and the primary one investors should be watching at this time to determine the company’s overall growth prospects.
Other regions continue to grow gradually, but it will take time for them to become the main catalysts for the company’s growth.
It was a strong performance from DCBO in the third quarter, and while it has many pieces in place in its growth puzzle, there are still economic headwinds, including inflation, higher interest rates and currencies that drove its numbers down.
The good news is that the fundamentals remain strong. The company continues to grow its customer base, which now has 3,245, more than 600 new customers compared to last year in the same quarter. Add to that the increase in its average contract value from $39,275 to $44,568, which when leveraged by the number of new customers, and it’s easy to see that the company has tailwinds that should bear fruit in the long run.
The other major tailwind is that around 50% of its customer base is now using DCBO in three and more use cases, making it stickier for those customers, delivering more predictable and sustainable performance over a longer period of time.
With the company’s stock price consolidating since June 2022, it failed to break out even with a few decent quarters. The exception is the response to its third-quarter 2022 earnings, where it rose from $23 to over $31 per share.
Even so, it still hasn’t been able to sustainably break through the average cap of around $32.00 per share. This means that the results of the earnings report are priced in, and it is likely to pull back and continue trading it within the range it has been for some time.
In the short term that probably won’t change, but in the long term I think he has the potential to perform well in the years to come.