T

Thinkific Labs Inc
TSX:THNC

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Thinkific Labs Inc
TSX:THNC
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Price: 2.9 CAD 1.05% Market Closed
Market Cap: 229.6m CAD

Earnings Call Transcript

Earnings Call Transcript
2021-Q2

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Operator

Good afternoon. My name is Inez, and I will be your conference operator today. I would like to welcome everyone to Thinkific's Second Quarter 2021 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Janet Craig, you may begin your conference.

J
Janet Craig

Thank you, Inez, and good afternoon, everyone. Welcome to Thinkific's earnings call for the Second Quarter of 2021, our first call as a public company. Joining me today are Greg Smith, Co-Founder and CEO, Miranda Lievers, Co-Founder and COO; and Corinne Hua, CFO. After the prepared remarks, we will open the call up to questions. During the call today, we will make forward-looking statements that are based on assumptions and therefore, subject to risks and uncertainties that could cause actual results to differ materially from those projected. We undertake no obligation to update these statements, except as required by law. You can read about these risks and uncertainties in our regulatory filings that were filed earlier today. Our commentary today will include adjusted financial measures, which are non-IFRS measures. These should be considered as a supplement to and not a substitute for IFRS financial measures. Reconciliations between the two can be found in our regulatory documents, which are available on our website. In addition, our commentary today will include key performance indicators that help us evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. Such key performance indicators may be calculated in a manner different than similar key performance indicators used by other companies.I should also note, we have a slide deck that supports our remarks available to download on the webcast interface or on our website. And finally note that because we report in U.S. dollars, all amounts discussed today are in U.S. dollars unless otherwise indicated. I will now turn the call over to Greg Smith, CEO of Thinkific. Greg?

G
Greg Smith
Co

Hello, and welcome to our second quarter 2021 conference call. Thank you for joining us. Thinkific's momentum continued in the second quarter of 2021, delivering year-over-year growth across all our metrics. Revenue increased by 101% to $9.1 million compared with the second quarter of 2020. We delivered ARR growth of 81% and an increase of 68% in paying customers. I am pleased with this strong performance and outlook, given the evolving behaviors of people as we see restrictions lifting. We continue to be firmly focused on our long-term strategy to make it simple for entrepreneurs and established businesses, our course creators, to scale and generate revenue by teaching what they know. We continue to provide the functionality for course creators to launch, grow and diversify their businesses by creating and selling online courses and other learning products. We believe any business can use education as a tool for growth. And over the past year, we've seen even more entrepreneurs and established companies adopt education as a core component of their business model. We continue to focus our innovation on the largest problems affecting the majority of course creators. This helps them achieve greater success and we scale along with them. In our second quarter, paying customers continued to drive our growth. Paying customer growth, combined with growing average revenue per user, or ARPU, resulting in our annual recurring revenue, or ARR, increasing to $38.1 million. We believe that the growth is driven by the strength of the Thinkific platform and user experience as well as growing brand awareness and increasing popularity of online learning and teaching online as a business model. COVID brought the future forward for us. And as expected, at almost 18 months into COVID with restrictions lifting, vaccination rates rising and among other factors, we are seeing our growth tempered relative to the explosive growth we had last year. We continue to see the underlying market forces contributing to our future growth. We remain firmly focused on what we do best, executing against our strategy and having an extremely data-driven approach to our business. We expect to deliver on our business plan this year. More on that later from Corinne. A key component of delivering on our growth strategy was having the financial flexibility to invest in and scale our growing business. Our IPO in April, raising CAD 184 million, has given us the financial capacity to do just that. Before I pass it over to Miranda, I want to turn to our course creators. We believe in putting the success of our course creators at the heart of everything we do. Our own growth is aligned with the success of our customers, and this creates a compounding effect in our business.

M
Miranda Lievers
Co

Thank you, Greg. Thinkific continues to invest in new features to support the ongoing success of our course creators. Before I jump into some of the products and feature announcements we have made to enrich our platform, I want to spend a moment on one of our customers. I'd like to introduce you to Jana Rohen, owner of Learn Photography Canada. She has been behind a camera for over 10 years as a professional photographer, starting Learn Photography Canada in 2012 with the vision of becoming Canada's premier photography course company by inspiring a passion for photography in individuals from all walks of life. As we know, the world has changed radically over the last year with the pandemic limiting travel and in-person gathering. While the pandemic forced Jana to move her business online and what she thought might be a short-term change, she now describes the long-term feature of her company as online. Jana shared, "Knowing that we can create such powerful connections with our online communities and courses, there is no way back from this, and I've never been more excited. The potential is endless as we're not constrained by borders or physical locations anymore. So we really are seeing the way to our business and personal goals, more now than ever before." Jana is just one of thousands of course creators that are expanding their business digitally through Thinkific's platform, bypassing the constraints of physical locations and transforming business models for online delivery. Her story of resilience, like so many others, is inspiring and the heart of what we're about at Thinkific. It's course creators like Jana that we think about and look to as we continue to build out our products and technology. The launch of the Thinkific App Store in May is one example of this and an important part of our long-term product strategy. The Thinkific App Store connects developers who can create and sell custom applications to course creators who are eager to further optimized functionality beyond Thinkific's core platform. The Thinkific App Store is a key tool that enables our course creators to customize their online course offerings. The initial response to the launch has been encouraging, and we continue to grow our App Store offerings in response. The Thinkific App Store drives benefits for our entire community, enabling course creators and app developers alike. And for Thinkific, the App Store accelerates R&D, adding new functionality by leveraging our growing ecosystem of third-party developers. It frees up resources within Thinkific's own engineering teams to focus on building core functionality, scaling architecture and creating more ways for third parties to connect to the Thinkific platform. A great example of our App Store in action is with Thinkific course creator, Women of Project Management, founded by Asya Watkins to support and amplify the voices of women and women of color in every specialty of the project management industry worldwide. Women of Project Management leverages multiple apps, from Zoom for live delivery to Mailchimp to connect with her e-mail tool of choice, to seamlessly grow her business and deliver world-class courses to her students. Her Thinkific sites provide exclusive members-only training, and she has earned $60,000 in revenue since launching last June, garnering 16,000 enrollments in her 30-plus courses to date. The Thinkific App Store will help us continue to build out our ecosystem, support our partners and add functionality for course creator businesses like Women of Project Management. To further support our customers and drive our growth, we began the rollout of Thinkific Payments in a calibrated fashion in July. This follows a beta release earlier this year. The addition of Thinkific Payments strengthens our product offering and enables course creators to sell more and spend less time on administration, which in turn allows them to grow and scale their businesses more easily. Thinkific Payments is built on Stripe, the industry-leading purpose-built payments technology for digital platform. It adds new functionality that is expected to increase retention and ease of use. It allows course creators to accept payments and manage payouts, orders and refunds directly in their Thinkific dashboards. Everything they need for their business efficiently is now in one convenient place. The new built-in checkout, a primary value driver for Thinkific Payments, is regularly tested and optimized to maximize conversion. Not only does Thinkific Payments simplifies the payment process for our course creators and keeps them within our ecosystem, but it also allows us to grow ARPU over the long term by allowing us to share in the success of our course creators. Specifically, Thinkific Payments will accelerate Thinkific's growth by increasing lifetime customer values significantly, while customer acquisition costs remain the same, creating a new revenue stream to support differentiating features that empower our customers and helping our customers achieve faster and greater levels of business success in selling their learning products. In the long term, the success of Thinkific Payments will help our customers grow while driving company metrics such as ARPU and revenue. We plan to offer Thinkific Payments as the default option to all course creators in North America before the end of 2021. And we expect Thinkific Payments to contribute to our growth in the mid to long term. Clearly, the launch of Payments and the App Store are key initiatives for our future, but this hasn't stopped us from continuously improving the customer experience for our course creators with the introduction of new product features. I just wanted to highlight a few of them. We have actively improved the experience for our Plus customers, making it easier for them to manage many Thinkific sites through one login and giving them access to more analytics and reporting to monitor and improve the success of their businesses. In July, we launched in-app live chat, an additional support channel to provide customers with instant access to help when and where they need it. We continue to make improvements and additions across many areas of the Thinkific platform, including improvements to the App Store, API gateway and developer documentation to better help partners build apps. Our trust engineering teams delivered performance improvements to make Thinkific faster for all course creators and students. I want to take a moment to reiterate our commitment to social impact, which has been part of our DNA since our founding. We have a deep sense of purpose, and aim to infuse the values of ethics and integrity by prioritizing transparency, sustainability, diversity and inclusion in all that we do. From developing products designed to support businesses of any size, to working hand-in-hand with our partners to serve our communities, core to who we are and how we operate is ensuring we have social impact. As one example of living these values, in July, we held our third annual Think in Color summit, which attracted over 20,000 entrepreneurs and small business participants from over 48 countries. Think in Color supports and celebrates underrepresented women who are striving as entrepreneurs and online business owners. A speaker lineup of 100% people of color delivered personal insights on all aspects of creating, marketing and scaling online courses and digital product-based businesses. We had a number of follow-on activities from this highly successful event, including an accelerator program where Thinkific committed $50,000 towards grants, bursaries and tools to help attendees launch and grow their digital businesses. Of course, none of this could have been accomplished without our people, our thinkers. We're incredibly proud of the culture we've built here, and we are confident that our team will continue to drive the success of our course creators working to succeed, to innovate and to drive our company's growth. Not only do we spend a lot of time studying data to improve the course creator experience, so do we with our people. And we see our investment in team and culture being validated by third parties as well. Following on the announcement we shared last quarter when we were ranked #2 on the 2021 list of Best Workplaces in Canada for teams of 100 to 999 employees, Thinkific has recently been nominated in Canadian HR Reporter's Best Places to Work. Winners were selected based on the input of employees who voluntarily provide anonymous feedback by completing a company review about their job, work environment and employer over the past year. We look forward to the results, which will be announced in October 2021. Thinkific operates as the intersection of education and commerce, and we are deeply grounded in impact and in the power of technology. So we were super proud to be named as a finalist in the BC Tech Association's 2021 Technology Impact Awards, the TIAs, for Company of the Year, Scale. The awards have been established to recognize the extensive work being done by the BC Tech community. The winners are expected to be announced in the fourth quarter of 2021. We're actively recruiting across Canada and are excited to add even more incredible people to our team. I'd be remised if I didn't encourage you to send the very best folks you know to our Career page at thinkific.com/careers. We are so excited about what is ahead. To speak about our current results, I'm going to turn the call over to Corinne.

C
Corinne Hua
Chief Financial Officer

Thanks, Miranda. Turning to our financial performance for the quarter. In the second quarter of 2021, we continued to see exceptional strength in our business, with paying customers driving our growth and the average revenue per user per month, or ARPU, continued to climb as customers upgrade their plans and unlock more features. While our growth rates remain strong, we need to be mindful of the unprecedented times we are currently living in. While we remain steadfast in our confidence in the long term, the near-term of the adjustment period has already evolved to a new normal. That being said, I want to echo what Greg stated earlier, we remain on track to deliver on our business plans for this year. Let's discuss each of these key measures in a bit more detail, starting with paying customers. We ended the second quarter with 29,200 paying customers, representing an increase of 68% year-over-year. As you saw with our two featured customer stories, Learn Photography Canada and Women of Project Management, entrepreneurs and established businesses continue to come to Thinkific from a broad range of backgrounds, industries and geographies. The creative economy is just getting started, and the breadth and depth of our customers continue to surprise and delight us. Our average revenue per user increased 7% year-over-year to $107 per month. This growth was primarily driven by subscription plan upgrades from existing paying customers as well as the new paying customers choosing to subscribe at higher tiers. When our customers succeed, we succeed, leading to strong growth in annual recurring revenue, or ARR. ARR grew 81% year-over-year to $38.1 million, driven by the strong combination of growing customer base along with ARPU expansion. ARR is a leading indicator of future revenue growth, and the ARR growth we continue to see is a testament to the strength of our business model. GMV expanded 48% to $102.5 million year-over-year, but declined slightly compared to the first quarter of 2021, due to a combination of factors, including certain customer programs ran in the first quarter, which didn't repeat in the second quarter; underlying seasonality in the business in which higher volumes of students are online in January as well as some impact of balances -- rebalancing some activities offline as the pandemic waned in certain geographies. As a reminder, while GMV is representative of the revenue of our course creators, it does not include transactions for core sales, member of subscriptions or other products and services processed by APIs or certain apps where the company does not record the transaction value. Turning to our P&L. In the second quarter, we delivered revenue of $9.1 million, 101% increase year-over-year. Our revenue continues to trend slightly ahead of plan, driven by a combination of increases in the number of new paying customers as well as the increase in ARPU from subscription plan upgrades. Gross margin for the second quarter of this year was 76% compared with 77% in the same quarter last year. We continue to expand our offering with live chat as an example, which we launched this last quarter and see this as a key area of investment in the near term to support our growing customer base and our broader base of product offerings. Hosting fees and payment processing fees also increased in line with the increase in our revenue. Thinkific continues to make significant investments in scaling our business and creating success for our course creators. Operating expenses grew to $12.3 million and represented 92% of our revenue compared to $2.9 million or 87% of our revenue for the same period last year. The biggest change in absolute dollars was in research and development with an increase of $3.2 million year-over-year, primarily due to an increase in compensation costs as we grow and scale the teams. Our R&D team continues to support and improve our platform and develop new product features as well as work on further developments of Thinkific Payments. Sales and marketing increased $2.9 million year-over-year, primarily due to continued focus on brand awareness and growth-focused investments, specifically, paid advertising and promotional costs and commissions to our affiliates. We also find increase in compensation costs as we grew our teams to support our sales and marketing efforts and grow our customer base. General and administrative expenses grew by $2.2 million or 242% compared to the same period last year. This increase was mainly due to an increase in compensation costs to support Thinkific's growth and related increase in general and administrative costs to a significant expansion of our operations as well as the increase in public company costs, which we did not incur in the prior year. Adjusted EBITDA loss for the quarter was $4 million compared to a loss of $0.3 million a year ago and in line with our expectations. You'll find a summary table of the calculations of adjusted EBITDA in our press release, MD&A and the investor presentation on our website. Thinkific's business performance accelerated materially over the last 2 years, partly due to the industry's rapid evolution and driven by changes in demographics, working ideologies and technology. These changes are propelling the shift towards digital consumption and the creation of online courses, which were accelerated by the pandemic. As anticipated, we are seeing evolving customer behavior, along with some choppiness across geographies as people and businesses are coming out of the pandemic. We are pleased to see that we have achieved our targets in the second quarter, and we expect to meet our goals for the year. Our long-term total addressable market, combined with Thinkific's highly differentiated course creation platform as well as our continued evolution of products, features and functionalities to support our customers, position us well to have a significant -- to have significant growth in the mid to long term. While we see gradual reopening of the economy and evolving behaviors of people coming out of the pandemic, there is a lack of full visibility on its potential impact. As a result of these factors, we remain conservative in our assumptions in the near term. For the third quarter of 2021, we expect revenue to be in the range of $9.6 million to $9.8 million, representing year-over-year growth of 60% to 63%; and adjusted EBITDA loss in the range of $7.6 million to $8.2 million. We believe we are just getting started, and we'll continue to invest in our products, our people and our platform with the long term in mind. And to wrap up the call, I will turn it back over to Greg.

G
Greg Smith
Co

Before we open up the call for questions, I wanted to close on a few key points. Thinkific will continue to capitalize on the market forces driving our industry, which we observe worldwide, and we'll continue to provide the tools to a growing number of entrepreneurs to enable them to succeed. We are on track to deliver as expected for this quarter and expect to deliver on plan for the year. We believe in the path we are on in terms of product development and innovation, growing our team and improving our organizational structure. Our continued focus on innovation to solve course creator problems leading to their success will in turn drive paying customers and ARPU growth. We are excited about the introduction of the Thinkific App Store and Thinkific Payments. These are long-term plays for us, and we expect them to have an impact in the long term rather than in the short to mid. We will continue to make data-driven decisions that are going to be key to our long-term success. Our strong quarter, we believe, underscores the strength of our strategy. And finally, the outlook we have for our business is evidence of our confidence that our business model is working, and we are just getting started. I will now turn the call back to Inez, our operator, for questions.

Operator

[Operator Instructions]The first question comes from Todd Coupland with CIBC.

T
Todd Adair Coupland

I wanted to ask about the impact of opening up on new paying customers. and whether or not it's tracking relative to your expectation that you did think it was going to moderate. So could you just talk about how that trended in the quarter relative to your expectations a quarter ago and maybe at the beginning of the year?

M
Miranda Lievers
Co

Greg?

G
Greg Smith
Co

Sure. Yes, happy to take that, Todd. So on the new paying customer front, I mean, we did expect coming into this period of the year that we would see evolving consumer behaviors, and we're certainly seeing changes in consumer behaviors that are affecting this. We don't see an impact in -- well, sorry, we do see an impact of adjustment periods here coming out of COVID and some noise and variability in our metrics. The paying customer count is a little off from where we were expecting it to be, but not significant in terms of an impact, obviously, on the revenue we're delivering. And of course, with our ARPU. That is performing well for us on the multiplication of those 2 to deliver on our revenue for the quarter.

T
Todd Adair Coupland

Okay. And as you think about the balance of the year and the pipeline and where you're targeting paid advertising, what are your thoughts on the pace of the business in Q3 and in Q4?

G
Greg Smith
Co

Yes. Of course, yes, I think the guidance speaks a little to the pace for Q3 and that we're still expecting to perform well throughout the rest of the year. We -- on the paid ads front, we have -- and we talked about this, I think, a lot during the IPO road show, of -- with the cash injection from the IPO, the intent and we are delivering exactly as planned, was to start to invest in some more longer-term marketing expenditure. So you will and have seen some of our sales and marketing spend increasing, and some of that is going into things that we expect to have a longer term, so less immediate return on some of those spends. That being said, the data we do have where it's driving traffic and free accounts is good in terms of showing early indicators that those long-term spends are actually starting to deliver.

C
Corinne Hua
Chief Financial Officer

Todd, it's Corinne here. I'll take that question on Payments. We obviously only launched to new customers started later in July. And so we are early days and really don't have significant data to share from that and it was a small group of customers that we launch to. However, we continue to have no reason to expect different results from what others in similar interests of experience. And based on results that we've seen to date from the beta release, we're quite confident in what's possible looking forward and expect to see Payments revenue contribute to our P&L in 2022.

T
Todd Adair Coupland

One last one, if I could sneak it in. Should we still think about Payments when you go live to the full customer set as a default option to the Stripe base?

C
Corinne Hua
Chief Financial Officer

Yes, our intention is to launch it later -- or before the end of the year as the default option. There will be customers who won't be able to leverage that based on the location that they're in or for other reasons that they're looking to -- we made the process payments in a way different than what we're able to offer them. And so there will always be options available to our course creators. We're here to help them be successful and I'd hate to ever get in the way of that, but do look forward to being able to serve their needs in unique ways through our payment features.

Operator

Your next question comes from Thanos Moschopoulos. with BMO.

T
Thanos Moschopoulos
VP & Analyst

Maybe expanding on Payments just to clarify following the initial limited launch, what proportion of customers -- new customers would have the option of taking Payments? I mean, are we talking about like a low single-digit percentage or -- just give us some context in terms of what the scale of launch is currently.

C
Corinne Hua
Chief Financial Officer

So we have launched a small group and the initial part of that process was to low single-digit numbers, and it's increasing as we close to the year. I believe we're sitting around 15% today, and that will continue to increase as we move forward. The plan would be for us to make it available to all customers, new and existing by the end of the fiscal year.

T
Thanos Moschopoulos
VP & Analyst

Okay. And to clarify, in the financials, when we're looking at the payment processing, cost of goods sold, does that relate entirely to Thinkific Payments, or would that also relate to any referral arrangements?

C
Corinne Hua
Chief Financial Officer

I thought I made this clarified on thing that I just said a couple of seconds ago, make sure I got it right, it would only be all North American customers. And I misspoke when I wasn't clarifying that element. And then with regards to the P&L, we do expect that the payment processing fees that we pay for Stripe's cost of goods sold, and it will be at a lower margin than our subscription business. As it becomes material, we will separate that out, so people can have the full information available in the P&L, but I am sorry, I actually had some material levels. And there will be some costs in association with the risk management around Payments. And so that will be hitting our G&A expenses go forward.

T
Thanos Moschopoulos
VP & Analyst

I guess just in terms of...

C
Corinne Hua
Chief Financial Officer

Maybe that -- sorry, go ahead.

T
Thanos Moschopoulos
VP & Analyst

No, I was going to say like this quarter, there was $338,000 of payment processing cost of goods. So I guess, the question was whether that entirely would relate to Thinkific Payments.

C
Corinne Hua
Chief Financial Officer

Yes. Thank you for clarifying that. No, that doesn't have anything to do with Thinkific Payments. That would have been what we paid to Stripe for processing our subscription fees today. And so, yes, we processed those fees through Stripe [indiscernible] for that to trade for them.

T
Thanos Moschopoulos
VP & Analyst

Okay. And then going back to the reopening dynamic. I mean, I guess you talked about the impacts on the new adds. I think you alluded to the fact that there might have been an impact on GMVs. Maybe just expand on that. Also maybe help us understand the potential seasonality in the business. Should we just be thinking about it being slower in the summer months than reaccelerating the fall winter? And then also, has there been any change in churn relative to prior months?

G
Greg Smith
Co

Sure. Happy to jump in on some of those. So the first one, no meaningful -- no impact on churn that we've seen. On overall pandemic impact, the way we're looking at it is definitely there's evolving behaviors right now. And I think it's early even for us to clearly say pandemic's over or done. Clearly, there's changes. And I think what we are seeing is some people are treating as if it is done and others aren't. And there are definitely ups and downs that we're seeing in various numbers of our KPIs on that front. And so we're leaning into it and pushing hard against it. We are a little bit cautious in the short term, but optimistic very much so in the long term. We've got an amazing market in front of us and a huge market opportunity. And so leaning into that, we're quite optimistic in the long term, and still expect to deliver strong in the short term. And then ,yes, on to the churn comment. As I mentioned, no impact on churn. And then you asked about the GMV front. And yes, so GMV has reduced the [indiscernible] by 4% this quarter from Q1. If we look back to 2019, we saw a similar dip in that quarter in GMV. So there is an element of seasonality, but our theory is that there is a little bit of COVID impact as well there. It's hard to parse out exactly how much of that is localized to this year in COVID impact, but definitely some seasonality and some current trend. And I think part of that is summer -- exacerbated by COVID and coming out of COVID and people going back to travel in a more meaningful way. But we're continuing to analyze all of the data on that deeply. And an example of that is what we're seeing in other vertical segment level. We did see some areas focused on, say, work-related skills increase in GMV from Q1, while areas like arts and entertainment decreased a little bit. And so digging in geographically and across different verticals and segments to see what we can understand. And of course, as we have more info, we'll share more info.

Operator

Your next question comes from Richard Tse with National Bank.

R
Richard Tse
MD & Technology Analyst

Just wondering if you can maybe give us a bit of color in terms of the current growth profile. Where is it coming from? Is there any sort of trends in terms of the types of course creators that are signing regional strength? Any trends that we can sort of look into here?

M
Miranda Lievers
Co

Richard, happy to speak to that. It's Miranda. Yes, I would say that across the platform, we're still really seeing as a horizontal platform, we're really seeing course creators coming on from across different industries. Greg pointed to that one stat where when we kind of like go a few layers deep, we're seeing marginal increases on the student consumption side around professional development courses. We're actually seeing on the course creator side that we're seeing more folks coming in now with hobbies and arts and some of those type of skills. But I would say that broadly, what that deep dive into the data has shown us is that we're not seeing any big trends or shifts that we wouldn't be expecting or anticipating. So I don't have much additional color to add there.

R
Richard Tse
MD & Technology Analyst

Okay. No, totally fair. I think we're all sort of trying to figure out this COVID impact here. And if I kind of look back and if you sort of go back to prior to COVID, if we can sort of remember those days, is it safe to say that the growth rate prior to COVID would be kind of a reasonable proxy or given the investments that you've made and investments you're going to make that will be at a heightened pace of growth here? I'm just trying to get some context, trying to kind of figure out that ex-COVID impact growth.

M
Miranda Lievers
Co

Yes, Exactly. And so when we think about growth rate since we're really sort of predicting a return to pre-COVID growth rates. And I Corinne, you probably have the number up in front of me. I think we were 63% year-over-year for revenue pre-COVID, and I think we're sitting just above that now. [indiscernible]

C
Corinne Hua
Chief Financial Officer

Yes, maybe just add some color. As we look to our guidance for Q3, we're ranging in the 60% to 63% growth year-over-year, so quite similar to what we experienced in 2019.

R
Richard Tse
MD & Technology Analyst

Okay. So still very healthy. Just a last one for me. I wanted to kind of get your thoughts on acquisitions and how you kind of rank acquisitions in terms of your capital allocation strategy.

G
Greg Smith
Co

Yes. On the acquisition front, we're certainly looking at some -- well, looking at no specific opportunities, but exploring it. And if you know any amazing corporate development people looking to hire there so that we can do more. I think it's not something we're likely to do anything this year. But looking into next year, we're looking for more solutions that can solve big problems for course creators as an area. And of course, with the App Store gives us a new window into data as to both where they're putting their money and where they're building their integrations and where they're adding new tools. And so using that as a view through to look for potential acquisition in 2022.

Operator

[Operator Instructions] And with that, your next question comes from Gavin Fairweather with Cormark.

G
Gavin Fairweather
Analyst of Institutional Equity Research

I wanted to start on the App Store, and I appreciate some of your commentary around that. I was curious for maybe a bit more color on how the developer community is engaging. Are you seeing a lot of apps currently under development and in the pipeline? Are you seeing some of your existing partners kind of productizing some of the functionality they've built for course creators in the past?

M
Miranda Lievers
Co

Happy to answer that, Gavin. Thank you for asking. Yes, we've definitely seen continued development in our App Store. I took a peek this morning because I know that we've continued to add where we launched the App Store as 30 apps, it looks like we've got up to 38 today, and I know that there are a number of additional apps in development. We are definitely seeing existing partners who are coming in, especially independent as opposed to companies who are integrating their product, who are starting to add additional new apps and functionality. And some of those folks had previously built sort of one-off apps directly with customers and now seeing that opportunity to build into the App Store. I'm looking forward to continuing to grow that number and definitely seeing a good reception from our customers in terms of excitement about being able to solve more of those course creator problems with bespoke apps in a way that they weren't able to achieve previously.

G
Gavin Fairweather
Analyst of Institutional Equity Research

Great. And then just secondly for me, I think a follow-on to the discussion with Todd. You're talking about your marketing and outspend and specifically around some of your spend on raising awareness. And I think you referenced some initial kind of solid returns on that line. Maybe you could just discuss kind of some of the metrics that you're tracking there? And anything that you could share on that front in terms of how those initiatives are raising the profile of Thinkific for potential course creators?

M
Miranda Lievers
Co

Yes, absolutely. No specific metrics to share, but definitely looking across the brand investment, things like customer sentiment and various elements there. But we're really early days in the focus on increasing marketing spend further up funnel and looking to expand those efforts to reach a broader array of potential customers. Greg mentioned before, one of the things that we are looking at from an early success perspective is how are we starting to see the returns, and we are seeing now new traffic, new free accounts ticking up from those investments and continuing to really watch the data as those customers mature through the journey with us and anticipate driving longer-term growth through that spend.

G
Gavin Fairweather
Analyst of Institutional Equity Research

Sounds great. And then just lastly for me. The gross margin had a bit of a dip of -- sequentially versus the Q1, although it looked like it did that also in Q2 of last year. Is there anything you would call out there, or is there any kind of seasonality there? I just wanted to quickly check in on that.

C
Corinne Hua
Chief Financial Officer

I was looking at seasonality to see if there were some indicators that we should be watching for there. But I actually think it has much more to do with just how our support team has been scaling up with the live in-app chat that we've launched in the quarter. We're seeing some additional costs, and are quite excited of what we're able to do for course creators by being able to drive that support. And so most of it has to do with us supporting our customers in a best-of-class way. And so we continue to invest in that area. I do think that as we look forward into this, we'll probably see continuous -- or a continual investment in this area, and I don't expect to see it move dramatically from where it's at right now in the next couple of months, but will be impacted by things like new features that are launched, such as Payments in the future.

Operator

Your next question comes from Robert Young with Canaccord.

R
Robert Young
Director

I think in a previous question, you said that there was some noise around -- noise and variability around some of the metrics related to consumer behavior. And I was wondering if you could talk a little bit, maybe add a little more color there, around engagement. Like are you seeing the same amount of engagement and in -- within the individual courses, like are people spending the same amount of time in courseware, or would you say that as we sort of come back into a normal environment, people are spending less time on the platform, the end-user, not the creator?

G
Greg Smith
Co

Yes, we do look at some of that. And seeing that there is still engagement -- good engagement in courses, I think the -- and like we sort of shared depending on geography and lockdown situation and also seasonality of summer and then even course topic, we are seeing some noise in terms of the student enrollments and student engagement. Some are up, some are down. So it's -- I wouldn't say we could pinpoint it to engagement significantly down. I would expect, around this time of year, specifically that both from a little bit of seasonality and also, I think, from people being a little fed up with being at home, that there will be some periods of people less engaging with their computers generally. But we haven't seen a lot of that data in the numbers yet.

R
Robert Young
Director

Okay. Okay. And then I'm not sure you provided -- did you provide any update on the App Store, whether there's any growth there or engagement with developers there?

M
Miranda Lievers
Co

Yes, exactly. So like I said, we had started the App Store launch as 30 apps. Today, we're up to 38, and I know that there is a number in development. So we'll continue to see that number tick up over time. and definitely have a good-sized group of developers who are building behind the scenes and eager to bring their apps to market.

R
Robert Young
Director

Okay. And then maybe just last question, just around the growth in ARPU. The -- I think it was 7%. The drive around that, that you highlighted in the press release is around conversion of nonpaid to paid -- But I was wondering if there -- are you seeing any benefit in those numbers from App Store or any of the other sort of new product things that you've been rolling out over the last few months or quarter or so?

C
Corinne Hua
Chief Financial Officer

There are 2 primary drivers to our increase in ARPU. And the first was more significant than the last quarter, which is customers upgrading their plans. And so to be able to get access to additional features, they are doing exactly that. We haven't seen any significant increase nor are we expecting to see anything from Thinkific Payment or the Thinkific App Store in this period as they're much more longer-term plays. On the other hand, we do have customers that come on to platform and immediately jump to a higher plan, often our Pro or Plus tiers. And so we do some of that happening in the quarter as well. And so both of those tend to be the drivers. As we look forward into the future that we do expect the two other product features, Payments and App Store, to contribute, but not for the immediate short term.

Operator

There are no further questions at this time. Mr. Smith, you may proceed.

G
Greg Smith
Co

Thank you. I really appreciate everyone joining us here today. We are really excited about the future opportunity for Thinkific. And as we like to say, we are just getting started, and we really are leaning into the future and building for the future success of our course creators. Thank you, everyone.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and ask that you please disconnect your lines. Have a great day.