Docebo Inc

NASDAQ:DCBO

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, everyone, and welcome to the Docebo Q2 2024 Earnings Call. [Operator Instructions] I'd now like to turn the call over to Docebo's Vice President of Investor Relations, Mike McCarthy. Please go ahead, Mike.

[Michael McCarthy, executive]

Thank you, operator. Earlier this morning, Docebo issued its Q2 2024 results. The press release, which included a link to management's prepared remarks and our quarterly investor slide deck were all posted to our Investor Relations website. This morning's call will allow participants to ask questions about our results and the written commentary that management provided this morning. Before we begin this morning's Q&A, Docebo 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 such 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 Docebo's public filings, which are available on SEDAR and EDGAR. During the call, we will reference certain non-IFRS financial measures. Although we believe these measures provide useful supplemental information about our financial performance, they are not recognized measures and do not have standardized meanings under IFRS. Please see our MD&A for additional information regarding our non-IFRS financial measures, including reconciliations to the nearest IFRS 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 Docebo's Interim CEO, Alessio Artuffo, and our CFO, Sukaran Mehta. Operator, we're ready for the first question.

[Operator]

[Operator Instructions] Our first question today comes from the line of Suthan Sukumar with Stifel.

[Suthan Sukumar, analyst]

Congrats on a strong quarter. For my first question, I wanted to touch on the Deloitte partnership. So this is obviously a major name in the government space. So great to see that name called out as a key partner here. And just kind of going through your prepared remarks, it sounds like this might be more of a strategic relationship than expected, one that covers both government and commercial and reseller opportunities. Can you share a little more color on the current scope and potential of this partnership?

[Alessio Artuffo, executive]

Alessio speaking. In general, in terms of channel partnership advance and our strategic partners' relationship, we are very, very excited. You are correct in stating that Deloitte is a marquee partnership and an absolute leader in the space. Look, they have an incredible human capital practice in North America, both in government and in the commercial space. If you think about the fact that they staff just over 15,000 people in the CTS practice alone in government and public sector, that's a very impressive number. We've been working with them on this partnership for many months. This has been in the works for quite a while, frankly. What this means for Docebo -- let's just clarify, first of all, what CTS or certified to sell means in simple terms. It certifies Docebo to become an asset of Deloitte, which Deloitte will wide label end market throughout their respective commercial channels across both the commercial space and the government practices. So of course, we expect this to have a significant impact over time to our pipeline across both the gov and commercial space. And look, another -- perhaps a notion that we are very excited about, because they're such a great firm that puts a lot of emphasis in the diligence of the processes that they run -- I think it's fair to say that when they work on an opportunity, they have a mechanic and a system of qualification based in the organization that allows us to dedicate our resources in deals that are already highly screened and highly qualified, which in turn makes us a lot more efficient. Finally, I want to underscore our working with the leaders at Deloitte has been delightful. These are just top-notch HCM professional, and we're just really proud of working with them and building a year's long relationship of success together.

[Suthan Sukumar, analyst]

For my second question I wanted to touch on guidance. It's good to see the higher guide this quarter. Can you help unpack some of the moving pieces there that underline your strength? Kind of just curious if this is more a function of sustaining customer win activity [ going ] ahead or larger size of customers, because I did notice an uptick there in ACV from large customers? Or are you seeing a lower impact from the SMB side?

[Sukaran Mehta, executive]

Suthan, Sukaran here. Yes, the guidance that we provided reflects really -- we -- as we thought about the year -- thought about our performance in the later part of this year, we are seeing a relative strength -- strength relative to what we guided at the start of the year, specifically around our enterprise segment and some of the government customers that may come through in the later part of this year. So I'm reflecting that in my guide to kind of speak to some of the strength in that part of the segment that we work to. And this is consistent with what we said previously, right? So we've consistently focused on moving up market. We should see some strength as we exit this year in that regards. And then to your point on the SMB side, it remains cautious. We talked about that. Those assumptions are pretty much in line with what we expected.

[Suthan Sukumar, analyst]

And if I just squeeze in one last question. On Dayforce, it sounds like you guys have come to a positive resolution here. Can you speak to the current state of the relationship here and the potential going forward?

[Sukaran Mehta, executive]

Yes. So in regards to Dayforce, as you can understand, in Q2, we have settled the terms, which are confidentiality bound. But the legal action was resolved with Dayforce. It was initiated by Docebo when they first acquired Illumina, a small competitor in Europe. And really, the dispute allows us to resolve and move forward and achieve 3 primary goals: one, protecting the IP of Docebo; number two, supporting our revenue base and continuity of our revenue base; and number three, preserving a good partnership and a working relationship going forward. And so as you think about our channel partners as well as -- including Dayforce and others, it's not only MHR and EY and Darwinbox. What Alessio just alluded to in response to the Deloitte partnership, we are now creating multiple channel partners that will provide us a diversification and opportunities to grow these revenue streams. And so you can expect that our goal is to continue to grow these channel partners. And with the addition also of our new leader, Travis Burke, who's joined the company as EVP of Corp Dev and Partnerships, we are certainly focusing our investments to drive more and more channel partners in the future.

[Operator]

Our next question comes from the line of Ryan MacDonald with Needham.

[Ryan MacDonald, analyst]

Congrats on a great quarter. Maybe just to start with the topic of AI and generative AI. It was great to see in the prepared remarks sort of all of the new solutions that are available or becoming available in the short term here. But I was intrigued by the comments around AI monetization. Can you just talk about what your conversations with customers and sort of their appetite to pay for generative AI solutions with Docebo? And then how you might start thinking about pricing some of these new solutions like the AI authoring solution?

[Alessio Artuffo, executive]

Ryan, Alessio speaking. We're very active, and we have been for years on the AI front as we have discussed many times. Shape was our, let's call it, first mover attempt at entering in the Gen-AI content creation market. And we did that well before the Gen-AI buzz of the past several months. In that time frame, since 2021, we sold Shape to hundreds of customers. And with that alone, that's an advantage for us. We have learned a lot. So we've taken a lot of those lessons and brought them back in the maturity model of our product on the AI side towards what we will be releasing shortly on the AI offering side. We can think about that in the context of taking Shape and evolving it. And really, it's making Shape even stronger thanks to the feedback that our customers gave us. We have a lot of expectations for AI offering in terms of success. And those expectations we think of them in 2 ways: one, increasing our right to win; and two, increasing our retention as well as customers more and more request a more advanced and sophisticated offering solution. But it doesn't stop at AI offering in terms of monetization. That's just our upcoming first step. The next steps we are going to be several and we're at work on many fronts. One we've spoken to and we're excited about is a solution that allows for virtual roleplay and virtual coaching. This solution is very much Gen-AI focused. We're already at work on it. We have said that this will be an early new year development. And we have also about this a lot of expectation and it will be highly monetizable. Now, you can expect an acceleration of additional AI capabilities and features in Docebo. And in general, look, we think about AI features also strengthening our core platform. There are several things that Docebo does already that are AI-based, and we'll do even more. But things like semantic search, recommending content, auto-tagging content, and a big topic, the topic of skills ontology management, meaning the ability to translate skills, taxonomies across varying systems. It's a very complex capability that we are going to not only offer, but we are going to invest on even further because the skills economy is here and it's a very, very pervasive need that large organizations have. But even further generate quizzes with AI and AI-generated voiceovers and translation. There's a lot that's coming up. I would wrap the topic of AI by saying that what we are noticing from a trend perspective is that customers are becoming more and more educated on this front. There was a lot more, I would say, the curve of -- the curve is now becoming one where customers are educated and are looking for business benefits as opposed to flashy features. And this makes me very happy because the Docebo team is really focused at building products to solve business problems. And so we will excite our customers with the products that we are building currently.

[Ryan MacDonald, analyst]

I appreciate the color and content and looking forward to more updates on AI at Inspire later this year. Maybe as a follow-up, I wanted to ask about sort of -- as you continue to roll-out the new pricing methodology and strategy to sort of net new customers and existing upon renewal, just curious to hear sort of what sort of feedback you've been hearing from customers on the methodology thus far? Any pushback? And I think there's sort of a goal here to simplify the buying process and shorten the sales cycle. So to any -- to the extent possible, any use cases you've seen so far where you're actually sort of seeing those benefits of a shorter sales cycle?

[Sukaran Mehta, executive]

Yes. Sukaran here. I'll take that. The pricing -- so just as a summary, the pricing changes that we made went live at the start of Q2. And really, what it's been important to highlight is that historically the company has tried as we -- to look at the pricing models on a la carte basis. And we've moved to what we call -- based on the value we provide the customer on the core use case. So think about it as a core bundle where we sell to our customers based on their actual use case. And enhance -- and any enhancements they require are part of an add-on. And so what this has done is effectively moved from what we would think as an a la carte model to driving value to the customer. And what that in effect has meant is that we are now discussing the problems that we can solve with the customer and the value Docebo brings to them. The new pricing methodology has actually been quite successful, I would say, at the onset. It's only the first quarter. So we'll provide more insight as we get through the later part of this year. What I'm certainly seeing is 2 things. One, as we are positioning our capabilities to the customer, we're not only speaking to value, but we're actually providing incremental capabilities as part of the whole package that is making the discussions much more meaningful. Number two, as you think about objection handling and overall deal discussions, this accelerate deal cycles. And so on the net new business that -- where this was initially rolled out to, we have certainly seen that positive impact in terms of how we approach our customers from a go-to-market perspective. And then the second thing I would say that it's early days, but we are also -- like I said, on the renewal book of business, this is a much longer exercise because there's a lot of terms and conditions and all the nuances that we have to be mindful of that the previous customer signed up -- or the current customer signed up to. But we are actually also seeing -- with the new capabilities that are coming out and have come out this year, we see there an opportunity to also move a reasonably good book of our business to pricing with the capabilities that are coming on board as well.

[Operator]

Our next question comes from the line of George Sutton with Craig-Hallum.

[George Sutton, analyst]

Nice results. So I'm curious if we could talk about the FedRAMP timing. You mentioned it's on track. I'm curious if we could talk about best guess in terms of when that would go live. And then just remind us what the potential opportunities that would expand would be from that.

[Alessio Artuffo, executive]

Alessio speaking. Sure. So FedRAMP and government in general are a very, very hot topic these days in Docebo. They are a big area of excitement. And to answer your question, our efforts in terms of expectations and timing are very consistent with our planning. Now, in terms of an exact date, nobody really can put an exact date to this, because there are a lot of external factors that we can absolutely influence, but not ultimately control. Our goal, to be clear, is to secure a sponsor and to swiftly move to be granted an authority to operate, which effectively opens up the gates of accessing the FedRAMP opportunities in the market. Now, what we've done over the past few months -- and we have completed our systems and processes and controls' readiness. So we are ready for a sponsor to take us and to pick us, to select us and go through the process together. The great news is that we feel that we have -- we're having the right conversations with agencies and that these conversations will yield the outcome that we want. In terms of the impact, in the past 3 years alone, from a new budget allocation to new initiatives in LMS that we were able to find, more than $200 million were spent on new initiatives. This, again, does not include recurring data. And that alone gives us a very good perspective as to the massive opportunity, particularly because the competition that operates within the space currently is one that -- when we think about the same competition in the commercial space, we outperform, out-beat, functionally speaking, every day. Yes, during the quarter, in terms of -- we just spoke to the Deloitte success, I think, in this context. Once we get FedRAMP approved that accelerate even further our opportunities with Deloitte thanks to the CTS program and further evolution of that partnership. But even directly Docebo irrespective of Deloitte, just to be clear, as build a government engine and a government team that is firing on all cylinders, not just in federal, but also on the other massive opportunity, which is state local and education, where we're growing our pipeline and winning business. And a percentage of revenue relative to their total revenue continues to grow. And so, yes, FedRAMP is a big priority. We are on it. But I also want to remind of the big opportunity that is led, which is here is now and we're executing on it.

[George Sutton, analyst]

One other thing that I found interesting the communities module seems like a very practical way to expand more aggressively into the external market, which is so important. Can you just give us a sense of what this is replacing or what significance this is in terms of a new capability?

[Alessio Artuffo, executive]

So communities was, first of all, from a thesis standpoint, the feature, the set of capabilities of the communities was very, very intended to support our CX or customer experience capabilities and supporting its success and penetration in the market. If I look back at this quarter's new logos as well as this quarter, significant upsells on my whiteboard, there's a lot of CX on it. And so that is just reflective of the fact that our strategy that has always been to become the platform that addresses the needs of organizations on both the CX and EX side explained in the direction that we wanted. How those communities fit in this? And LMS allows primarily for learning, delivery and dissemination. What it doesn't cater to necessarily is a deep form of collaboration of audiences involved in the learning processes. There are various scenarios and use cases that we've learned of our customers where a community technology is necessary in the context of a learning experience. We have op-tier system integrators that implemented these use cases. Docebo itself has its own community as a software company for its own customers. It was very clear that this capability is a pervasive need. And so we bought PeerBoard that was a small company and built on top of it. So market readiness and ability to market communities will start on August 15. We feel very, very excited about it. We are going to really focus on its success at launch, but also the continued iteration to build features after feature after features at a great pace for our customers. And I want to say beta programs have been running for these new modules and products. In the community, early days results of those betas have been very encouraging with many end raisers or companies saying we're going to buy during beta. So of course, its early days and it's early to say exact figures for this module. But I'm hoping you can appreciate how it ties to our long-term strategy, further differentiates us and creates an opportunity to increase a right to win and our average ACV.

[Operator]

Our next question comes from the line of Josh Baer with Morgan Stanley.

[Josh Baer, analyst]

Congrats on a great quarter. Looking at the growth pillars, you got external and enterprise, government, broader distribution partnerships and channels. Wondering where wall-to-wall LMS deployments fits in. Is that a focus area? Or are you seeing traction in ripping and replacing legacy vendors for wall-to-wall LMS? Or is the focus more land and expand, adding use cases, departments and products over time.

[Alessio Artuffo, executive]

Josh, our focus is really to position ourselves as the platform that suits the needs of large organizations across multiple use cases. One interesting data point is for every 10 customers we have signed in the past quarter, 8 of them have chosen Docebo for 2 or more use cases. I think that the other data point that I'd like to underscore in the context of your question. And I want to address the wall-to-wall or end-to-end concept is if I think back of the investment to be put in place in order to grow our average customer profile, ideal customer profile and make Docebo more suitable for companies that want to implement multiple use cases. Just think about the fact that in the past 24 months, in the past 2 years, our new logo ACV grew about 70% to what this quarter, $71,000. And that's not inconsistent with our decision to grow our business by embracing more EX employee experience-based use cases and CX use cases, i.e., we're investing, putting money at work in the product to strengthen capabilities that are across both the EX side, employee experience and CD side. There is no doubt in my mind that this is the #1 differentiating factor today of Docebo, this ability to really cover the majority of the use cases and to be a feature-rich platform. The thing that I obsessed about a lot is maintaining this competitive advantage. And in order to maintain it and to grow it, our job and our focus is to continue to grow the capabilities of our platform in both areas, making effectively that bar that we've set very high, always harder and harder and harder to reach for those competitors that try to reach us in terms of competitiveness. Yes, that wraps it from me.

[Josh Baer, analyst]

And then I was just hoping that you could comment, I know enterprise and government very strong. I was just hoping you could give an update on what you're seeing in the SMB just as far as the seat optimizations, any stabilization there, saying, better or worse?

[Sukaran Mehta, executive]

Josh, Sukaran here. I'll take that one. Yes, I would say it's pretty much consistent what we saw -- what we call our last quarter remains cautious. It's a cautious buyer as you think about the renewal cycles. The macro is probably more in our world, more sensitive to that type of customer. So it remains consistent from our perspective. But I think what's important also from what we're speaking to is that the focus from a company perspective has been -- we've talked about moving up market mid to large enterprise customers and government. And our investments, whether you think about inbound, outbound, system integrator, channel partners are driving the pipeline in the right place, meaning where we have the right to win and multiple use cases that we can serve in these organizations. And so, we'll continue to execute in that regard. I think what you're also seeing one thing that's important in this cycle is that, of course, every company is trying to make sure that they have enough of a pipeline coverage, so you have to drive a slightly higher pipeline. But we're also doing it in a way that is efficient, because if you think about system integrators and others that drive my pipeline outside of the low end of the market, more in the mid-market, large enterprise and government. They also bring an advanced stage of pipeline too. So I think those are important factors as you think through deal cycles, how we generate that pipeline, where we're moving the numbers that Alessio spoke about are important as we move forward in the next few quarters. You'll see that our focus is not necessarily on customer count per se. It's more on the quality of the revenue that we bring in and sustain over an extended period of time from an LTV to CAC perspective. And that's where the SMB market. We've called out in the past. We'll continue to serve that market from a competitive landscape perspective. But our more primary focus remains mid-market, large enterprise and government.

[Operator]

Our next question comes from the line of Robert Young with Canaccord Genuity.

[Robert Young, analyst]

Just wanted to get a little more context from you on the steady decline in the customer adds per quarter. And I know you addressed that around the shift towards mid-market and larger. But I mean, for someone who's looking at these numbers and perhaps taking away a more negative takeaway here. And given that ACV really hasn't inflected up over the last couple of quarters. I'm curious about how you look at that on a quarter-over-quarter basis? That continued drop in new customer adds? Just maybe a summary of what's going on there.

[Sukaran Mehta, executive]

Yes, Rob, I think this is -- it's a good question, an important one. For us as a business and as I just spoke to the response to Josh's question earlier before you is that we are focused on driving our business where we see the best-in-class unit economics and where the growth is from an ACV perspective. Actually, the one quick point is ACV has gone up since last quarter from 59,000 to 71,000. So if you look at Q4 being the strongest quarter, we actually are at the same levels as Q4 this quarter 2 from an ACV perspective. But the reality is that as we move forward in the business, the customers that we add is not necessarily a good indicator relative to the growth we are showing overall from a revenue perspective. If you just look at the enterprise customer cohorts or the customers we speak about the mid to large enterprise customers, we grew that business 30% year-over-year. And I can potentially have one large enterprise customer wipe out 10 to 20 SMB customers in one win. So if you try and do the math around customer adds and ACV, I don't think that's necessarily going to be a good indicator of looking at the business going forward. And so, that's really where I would kind of highlight the view because historically, I understand over the last 4 years, when we started giving this disclosure, it was important. But as we move forward and add large enterprise mid-market customers, I think you can expect that the customer add becomes address less relevant rather than the revenue we have overall.

[Robert Young, analyst]

And then you had some large deals in the quarter in the press release looked like larger deals. As you look at the pipeline, would you say that there are very large deals like mega deals sort of on the long lines of Amazon, Google, et cetera, that are still in the pipeline? And like are there any in the current quarter that would have been close to that size, maybe just sort of break out the different cohorts of size of customers in the pipeline if you can, in any way and I'll pass the line.

[Sukaran Mehta, executive]

Yes, Rob, just generally, as you think about the customer deals that are in the pipeline. I'll speak to in a second, but the ones that were in the quarter, these are our large customers, large 6-figure deals. And also we -- one of the things that's important with the customers we serve is that if you look at example like Databricks this quarter. We continue to expand. It's not just about what we get in the onset. We continue to expand, especially as you think about the CX learning, whether it's customer add, partner add. You will see that the customers, as they see their products and capabilities being delivered from a learning perspective to their end users, that adoption also increases. So the Databricks team is important to be mindful of as you think about the names that, for example, Axon this quarter or companies, the cybersecurity company that we also won this quarter. These are customer education platforms that will expand over time. But to answer your question, this quarter, these are healthy 6-figure deals closer to 7 figures. And also the pipeline, I've said this before. As we look at the pipeline, there are certainly large opportunities in the pipeline. We call them and strategic, meaning 7 figures and above. And I think for those type of opportunities as we get closer and absolute certain in the timing of the closure of those deals, until that moment, I certainly don't forecast them. But you are right. There are certainly a number of opportunities that are large in our pipeline that we are excited about, both in government and enterprise customers.

[Operator]

Our next question comes from the line of Erin Kyle with CIBC.

[Erin Kyle, analyst]

It's Erin Kyle on for Stephanie Price. Maybe if I could just ask a question on your capital allocation priorities when it comes to M&A versus share buybacks? And how are you thinking about tuck-ins at this point? And then maybe just related, if you could talk about your appetite for M&A versus making organic growth investments as well?

[Alessio Artuffo, executive]

Sure. Erin, look, in the past, for sure, we have not approached M&A with very sizable acquisitions. That's a fact. We have focused our efforts on continuing to build our platform from within and have brought on board the smaller entities like PeerBoard and Edugo to accelerate our advance in strategic aspects like communities as we discussed just now and Edugo from a very strategic, very important for AI acceleration. But where we sit today? We have both our capital structure and free cash flow generation. They provide us with a great deal of opportunity and flexibility both. One of the things that we said recently that we brought on board a gentleman by the name of Travis Burke, who is a very senior corporate add professional to really help us in the definition and execution of our corporate plans. So at this point, look, we are really thinking very deeply about quality investments. They have to fit our long-term vision for the business. The priority here, Erin, is creating value, value for the customers and value for the prospects. And in reaching our solution and growing it horizontally and winning more market share. What we are not keen to do is to double, triple overlap capabilities, because we have seen what that does on the receiving end by talking to customers that are working with companies that are doing that. And we ourselves are reaping the benefits of that strategy.

[Erin Kyle, analyst]

And maybe I can just switch gears question for you, Sukaran on cost optimization. It looks like your G&A expense declined as a percentage of revenue by about 50 basis points this quarter. Is that sort of the pace you should be modeling for G&A optimization sort of quarter-over-quarter? Or how should we think about that? And is there a longer term target that you can point to here?

[Sukaran Mehta, executive]

Yes, it's a good question. Maybe you're asking a good question, prior to Inspire when, I'll give some update there at the Investor session. But I think the simple way to think about G&A in this business is, you've seen for the last 6 to 7 quarters, G&A has been either held flat or actually down on an absolute dollar basis. And I think you can just -- this is the gift that should keep giving from an operating leverage perspective and will be an important lever as we kind of continue to show operating leverage. So I think that's really the simple way to think about it is generally the absolute dollar should be relatively flat. And we've executed that by -- and the reason for that, most importantly, is also because we've made significant investments in systems and capabilities that from an automation perspective, whether it's finance, HR and even in sales and marketing. The efficiencies that you're seeing is because of the major rollout we had last year from a Salesforce 2.0 rollout perspective. And so that is where G&A is going to continue to deliver from an execution, operating leverage perspective. And so hopefully, that gives you enough color for now. I'll provide more color as we speak at Inspire. But G&A, you can expect will be held relatively flat and will just be the -- as we grow the business from a revenue perspective; it's just the operating leverage that comes through the system.

[Operator]

Our next question comes from the line of Daniel Chan with TD Cowen.

[Daniel Chan, analyst]

You're doing better than what we've seen from some HCM peers. Why do you think that is? And do you anticipate potentially higher unemployment to be a headwind to your momentum?

[Alessio Artuffo, executive]

Daniel, thanks for the comment. And it goes back for me to the strategy that I was referring to before. The reason why we are is that we are focused strategically on what somebody was referred to before have the wall-to-wall logic or end-to-end logic. We reaped the benefits of growing in the organizations and addressing the needs of both employees and then a world that is made of customers, partners and various other entities that surround our customer ecosystem. If I think about the Axon win, which we have communicated that is an example of a combined customer education and employees use case. If I think about U.S.A. Hockey that we've communicated, that's a partner-driven play. And if I think of Databricks that there is, again, a massive customer experience, play in it. And so think about this. 65% alone of our ARR is attached to the CX/hybrid use cases. That means in simple terms, well more than 50% of our business is supported by this capability of playing as an integral function of the go-to-market mission critical of the companies we work with. I believe that is one of the key ingredients, if not the key ingredients for us to have an advantage over those HCM players that are, by any means, focused on the end user persona being an employee only.

[Daniel Chan, analyst]

And maybe another question on the government timing. Do you anticipate any impact from the coming U.S. elections on the timing of your government opportunities? Is there any risk things pause from here both from a FedRAMP certification or even RFP perspective?

[Alessio Artuffo, executive]

We don't believe so. Like we said, from a timing standpoint of things, nobody knows exactly. It's very hard to predict an exact date. But we believe that the processes that we are running are quite independent from the outcome of that and therefore, don't expect a major impact.

[Operator]

Our next question comes from the line of Richard Tse with National Bank Financial.

[Richard Tse, analyst]

Yes. As you kind of continue this shift towards larger enterprise, can you help us understand the timing, how your existing base of smaller customers will tail off? Like I'm sure it's not going to be immediate, but like just trying to figure that out from a modeling perspective.

[Sukaran Mehta, executive]

Yes, Richard, I'll take that one, Sukaran here. I think it's important to underscore. We will continue to play in the lower end of the market from a couple of reasons. One is that is a market where we will certainly learn about how the competitive landscape, who is the next capabilities of Docebo and that is up and coming. And second, with the capital and the investments we make from an R&D perspective, it keeps us on our toes. And so that strategy remains consistent. What we will see is that the customer that even from a pricing perspective. This quarter, what I didn't articulate earlier was that even from a pricing and capabilities point of view. We have simplified our go-to-market motion for the SMB customer and ensured that our investments are aligned to drive the right LCV to CAC in that lower end of the market. So you will still see us play in that market. But if you ask us where the incremental growth is going to come from and that's how we think about the business from a growth perspective. The incremental growth and the investments are to drive the superior unit economics in the mid-market, large enterprise and government business. So what I want to make sure everyone understands we will still play in that space. We will continue to build features around that supporting the low end of the market. But we are being very thoughtful about LCV to CAC. And how we want to ensure that the business is run to drive the best-in-class unit economics and revenue growth. And that's kind of how you should think about it. It's certainly not going to be the case that we're going to go away from that side of the business, because that's really what gives us the competitive edge as well.

[Daniel Chan, analyst]

And then with respect to the net new wins, can you help us understand what channels they're coming from or perhaps the mix of channels partner versus direct or other?

[Alessio Artuffo, executive]

Sure. So in terms of net new wins, we continue to source the majority of our business directly, no doubt. We continue to grow our pipeline with a focus on the mid enterprise to large enterprise. We are very excited about the trend in that regard for the quarters to come in terms of pipeline growth percentage. Relative to the enterprise space, very critical has been the contribution of SIs. We named Deloitte, but we also continue to work with different SIs across the multiple fronts and geos. I would say our enterprise posture is strengthened by the fact that working with this enterprise with these integrators, not only on the generation side but also giving them opportunities for services, gives us an advantage, because some companies have high complex needs, not just of implementing elements, but it's part of a much bigger digital transformation. So working with these, SIs is a critical component of our strategy.

[Operator]

Our next question comes from the line of Kevin Kumar with Goldman Sachs.

[Kevin Kumar, analyst]

I wanted to ask another one on Dayforce, just trying to better understand the impact to the model here. Anything you can share in terms of how large the partnership is today and how you're thinking about the short and medium-term impacts to the revenue contribution moving forward?

[Sukaran Mehta, executive]

Kevin, Sukaran here. Like I said, I think just I'll start with the point that we resolved the legal action with Dayforce as you can understand the terms of the settlement are confidentiality bound. What I would say is that whilst we've resolved the action with Dayforce, we initiated as part of the acquisition of Ellume. The main goal for us was to protect the IP, continue the revenue base and preserve a good working relationship and partnership going forward. I think the answer is at this point, any of the discussions that we've had as part of the settlement terms in 2024, you've seen that embedded in my guidance. And as we work through some of these, settlement; terms and have that information in the next few months. We'll provide some of the out-year guidance at that point. But you can imagine that part of this relationship is to continue to -- our focus is to continue to build more and more channel partners. We've obviously spoken about the fact that EY, Darwin box and MHR are the ones that we continue to ramp. But now with the announcement of Deloitte as another channel partner, we are driving a much larger partner channel as well as a diversification of the revenue stream. So that's how we think about the business. I would say that as we think through the settlement terms, we'll provide some more updates on the out years as we provide guidance for next year.

[Operator]

Our next question comes from the line of Martin Toner with ATB.

[Martin Toner, analyst]

Can you just talk to yet you had a nice incremental ARR number in the quarter. Can you talk to what the pipelines look like? Has it improved in the quarter and what your thoughts are going forward?

[Alessio Artuffo, executive]

Sure. Martin, Alessio speaking. So as I mentioned before, pipeline trends continue to grow very positively. Late last year, we made further efficiency improvements to our demand and business development engine. And unsurprisingly, these improvements according to our expectation started manifesting in enterprise qualitative enterprise pipeline that is coming up in this H2. I would say, I would outline some things from that pipeline that I believe are very interesting. The #1 theme that we see is that -- we've always been very focused. We've always had a lot of success in the software and IT verticals. Cybersecurity, even recently being an incredibly strong vertical, we have signed in that, sector 2 worldwide leaders recently, back-to-back. I would say the other trend that has been very interesting that we're seeing clearly in our pipeline. Constitution is that post-COVID there's been a resurgence in onshoring activities. And this has given us great opportunities to support the supply chains that require the need for reskilling and upskilling. Another aspect that is becoming very clear as the win opportunity for Docebo is the pervasiveness of our any times customers who want to implement the go-to-market revenue play in their use case. And when they do, our e-commerce capabilities play a critical role. Hundreds of millions of dollars have been transacted on Docebo. This is a data point that we reflect on a lot. And that represents very clearly our customers are using Docebo, not just as a training platform, but also as a monetization platform itself. And finally, I want to underscore a couple of things relative to verticals. Docebo is being raised in my opinion over the years as we have been growing as a horizontal platform. That means we've sold and been successful in various industries. As we grow our footprint, we recognized that in order to maintain high efficiency and high quality of revenue. We need to become better and better and better at our posture in certain strategic segments and we've taken steps towards that. We are doing really well in the fin-served financial services vertical, for example. We've been investing in it with some level of specialization in the past year. And look, we've seen banks, asset managers' insurance companies, very, very eager to modernize their stack, their approach to skilling and reskilling that historically was based on, if you will, more legacy technologies. Then finally, I'll wrap it with one topic, actually 2. I would say one that we're really excited about is that customers, our customers and prospects talk to us a lot about skilling and reskilling. We're paying a lot of attention to this. We see essentially as we see ourselves as an enablement technology that allows mapping of skilling journey of our customers and employees. And so really think about as a brokering platform for upskilling. And to close on this point of pipeline and trends, I would say, government. Government is a very, very significant contributor to our pipeline. It's accelerating according to our plans, no particular surprises. But we're very pleased to see the growth of our pipeline in government for now, limited to the flat market, which is where we have the current right to win. And as we further our feathering posture, there is going to be even more to come. So we're very thrilled.

[Operator]

We have no further questions at this time. I will now turn the call back to Docebo's CEO, Alessio Artuffo, for any closing remarks.

[Alessio Artuffo, executive]

Well, we thank you for having with us today again in yet another earnings call. We always love to share our story and to keep you posted with our success in building the best leading company in the world. I want to remind you that we have our customer conference set for September 9 through 11 in Dallas U.S. We warmly await the analyst community to join us there and to learn more about what we're up to. We will be unveiling some really interesting initiatives that Docebo is taking for the futures and really look forward to seeing you there. Thank you for being with us today.

[Operator]

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