Release Date: April 04, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Total revenue for Q4 was up 11% to $47.6 million, with subscription and support revenue growing by 12%.
- Annual recurring revenue increased by 12% year over year, growing to $188.1 million.
- Gross margins increased by 330 basis points to 67%, driven by higher subscription margins.
- Adjusted EBITDA increased to $3.5 million in Q4 from $0.4 million in Q4 of the previous year.
- The company has strengthened its market position, jumping to number two in total enrollment in market share in North America higher education.
Negative Points
- Professional services and other revenue decreased 10% for the full year based on large engagements wrapping up at the end of the prior year.
- The company is still facing elongated sales cycles and a slow rebound of RFP volume.
- The guidance for fiscal 2025 suggests a slight contraction or at least flat year-over-year performance for the services side of the business.
- The D2L Wave spin-off transaction is expected to impact revenue and adjusted EBITDA until its expected midyear close date.
- The company acknowledges the need to manage elongated sales cycles and general market activity levels, indicating ongoing market challenges.
Q & A Highlights
Q: What factors should be taken into account for the ARR growth at 12%, which is steady, but the guidance for growth in subscription and support revenue is a little shy of that at the midpoint?
A: Josh Huff, CFO, explained that they consider the timing of flow through to revenue recognition and general market activity levels, noting elongated sales cycles. The guidance reflects numbers they stand behind with conviction. They added $20 million to ARR in FY24 while keeping OpEx flat, and they expect a similar dynamic in FY25.
Q: Is there a degree of conservatism in the guidance due to the D2L wave revenue dropping off this year?
A: Josh Huff, CFO, mentioned that they are pleased with the progress and the balance of top-line growth with profitability. The guidance includes the expected impact of the D2L wave spin-off transaction, which is anticipated to close midyear and contribute to increased profitability in the second half of the year.
Q: Can you comment on the slight contraction or flat year-over-year performance for the services side of the business?
A: Josh Huff, CFO, reminded that services revenue tends to be about 50% implementation and 50% consulting and advisory, with the latter having less predictability. They are providing a services outlook that they stand behind with conviction.
Q: With the D2L wave spin-out, how does that affect your efforts to penetrate the enterprise market?
A: Stephen Laster, President and COO, stated that they remain focused on the corporate market and have invested in M&A, such as course merchant technology, to accelerate growth in that market. The spin-out transaction allows D2L to focus entirely on the expansion and growth of the core learning platform and services business.
Q: Could you compare the pace of growth expected from the corporate market going forward to the core academic markets?
A: John Baker, CEO, indicated that while higher education is doing well, they expect corporate to outpace it due to the size of the market and early entry. With over 500 corporate clients, they anticipate that segment to scale much faster.
Q: What signs do you look for to show that buying activities are back to pre-pandemic levels?
A: John Baker, CEO, noted that while the market is slowly rebounding, they still see elongated sales cycles and a slow return of RFP volume. They are seeing a continued trend in a good direction but cannot bank on things coming back faster this year.
Q: Are you taking market share from your main competitor in the higher education space?
A: Josh Huff, CFO, confirmed that they are pleased with the progress and are now winning more deals against their main competitor and taking away some of their business.
Q: Do you need to make product and sales strategy changes to address international markets where legacy platforms like Blackboard and Moodle have a strong presence?
A: Josh Huff, CFO, believes that D2L can move even faster in some international markets and that they can outpace North America in terms of organic growth. They plan to go deeper in markets where they are winning and open up new markets with opportunities.
Q: How should we think about the EBITDA margin pre and post the D2L wave spin-off transaction in your full-year targets?
A: Josh Huff, CFO, explained that the spin-off transaction is expected to close midyear, impacting Q3 and Q4. The second half profitability scaling upwards includes the operating scale of the company and additional growth dropping through to the bottom line.
Q: What gives you confidence in the long-term growth rate and fundamental opportunity of the market?
A: John Baker, CEO, sees a tremendous opportunity to support better learning experiences globally as education is largely undigitized. He anticipates substantial growth in higher education enrollment globally and a transformation in corporate learning, indicating a major problem for organizations that D2L can address.
Q: How impactful is generative AI as part of the trend towards the digitization of education?
A: Josh Huff, CFO, sees generative AI as a tool to further improve productivity for users and is shifting their product roadmap to address generative AI, with plans to roll out a base level of AI as part of their core offering and enhance packages with new AI technologies.
Q: How much visibility do you have on pipeline trends in fiscal year '25?
A: John Baker, CEO, mentioned that the pipeline continues to expand and grow, and they are making investments in their go-to-market motion and product roadmap, leading to exciting opportunities ahead.
Q: Are there any markets you're focusing on for 2025 versus what you experienced in '24?
A: John Baker, CEO, stated that international markets are growing faster than North America, and they plan to go deeper in markets where they are winning and open up new markets with opportunities.
Q: Does the D2L wave spinoff business transaction affect any of your investments in sales and marketing or R&D in D2L?
A: Stephen Laster, President and COO, said they continue at the same levels of investment and focus according to their business plan and are excited about their progress.
Q: How much visibility do you have on pipeline trends in fiscal year '25?
A: John Baker, CEO, said that Q4 is a good indicator of progress, with ARR holding consistent and the pipeline expanding. They are focused on executing their go-to-market motion and product roadmap.
