Thinkific Labs Inc

TSX:THNC

Earnings Call Transcript 2023-Q2

[Operator]

Good afternoon. My name is JP and I will be your conference operator today. I would like to welcome everyone to Thinkific's Second Quarter 2023 Financial Results Conference Call. As a reminder, this conference call is being broadcast live on the Internet and recorded.

[Operator Instructions]

I would now like to turn the conference call over to Janet Craig, Head of Investor Relations. Please go ahead.

[Janet Craig, executive]

Thank you, JP, and good afternoon, everyone. Welcome to Thinkific's Earnings Call for the Second Quarter of 2023. Joining me today are Greg Smith, Co-Founder and CEO; and Corinne Hua, CFO. After the prepared remarks, we will open up the call to questions.

During the call today, we will discuss our business outlook and make forward-looking statements that are based on assumptions and, therefore, are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These comments are based on our predictions and expectations as of today. 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. They should be considered as a supplement to, and not a substitute for IFRS measures. Reconciliations between the 2 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 the manner different to 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, all dollar amounts discussed today are in U.S. dollars unless otherwise indicated.

I'll now turn the call over to Greg Smith, CEO of Thinkific. Greg?

[Greg Smith, executive]

Thank you, Janet. Hello, and welcome to our earnings call. Thank you for joining us.

In the second quarter, we continued to execute against our strategy and remain focused on helping creators succeed. We delivered revenue of $14.4 million, which was above the top end of our guidance range. Adjusted EBITDA was also better than what we guided to, improving to a loss of $1.2 million. Other notable results included total paying customers, which were 34,300, third consecutive quarter of customer growth.

Thinkific Payments continues to perform well with a penetration rate of 30% and GPV, that's the amount of payments processed on Thinkific Payments of $31.4 million. Our achievements reflect the clear priorities we have for this year. As always, we are maniacally focused on helping our creators succeed. We do this by making it easier for them to get started and make their first sale, helping creators sell and earn more to grow their businesses and continuing to drive success with larger customers on Thinkific Plus. Our creator story this quarter is a great example of how Thinkific makes it easier for creators to get started and earn more with Thinkific.

The team recently spoke with Halisi and Ric, the remarkable founding couple behind our Black Utopia. They are an incredible example of how well our platform is able to provide the resources and infrastructure to empower new creators to build and scale amazing new businesses. Halisi and Ric joined Thinkific in May 2022, starting on the free version of the platform and growing from there. They quickly became members of our Thinkific Accelerator program, an education program run by Thinkific on Thinkific that provides all the tools, methods, coaching and a peer group to help creators launch and build their business much faster.

After launching their course Beyond the Bling, designed to help those in the black community age 45 to 65 achieve financial freedom, they saw a return on their initial investment in just the first week of sales through building an engaged audience on YouTube and taking advantage of a mailing less from a previous profession, Halisi and Ric were able to quickly monetize their audience, enabling them to experience life-changing success as online teachers. Not only has Beyond the Bling very quickly become a powerful tool for helping their growing audience achieve financial freedom, they've been able to retire 10 years ahead of schedule and grew their net worth to $1 million, now living in the sunny paradise of Portugal. This is a great example of the success of the Thinkific Accelerator program and helping creators launch quickly and achieve new levels of success in their business.

We believe early-stage creators present an enormous opportunity for future growth and we remain keenly focused on providing the very best tools and support that they need to get their business started and to help them grow and thrive. And this is where a new product we are officially launching in September comes in. To give you a bit of a sneak peek, The Leap is a product that will help creator educators that are in a similar position to that of Halisi and Ric when they got started.

These creators may post on YouTube, TikTok or Instagram, and they have a following, but they are finding it challenging to find ways to monetize their knowledge or perhaps it's daunting for them to build the course. That's where The Leap comes in. Fueled by AI, we support creators building their knowledge into a digital product in minutes. This builds on the concept of micro learning and the growth of learning on micro content platforms like TikTok, accelerating the trends towards everything Mobile and micro learning. Learning on demand, where you want it with consumable nuggets.

The Leap provides tools to help creators in building many courses, growing their e-mail list, planning their digital products, monetizing their audience, including on TikTok and driving engagement via creator group chats. These are just some of the ways we'll be supporting the creators through The Leap. Up until now, the Leap has used blog content, social media and other resources to support creators. But we saw an opportunity to allow them to get started and achieve results more rapidly. Creators are able to get started in minutes or hours, not days or weeks. The Leap is currently in beta testing, but officially launching in mid-September. You can check it out at theleap.co.

For making it easier for creators to get started, we also wanted to ensure they are able to sell more and spend less time on administrative functions. That's where Thinkific Commerce comes in. Thinkific Commerce is a growing suite of tools built on top of our hugely successful Thinkific Payments platform. It is designed to help customers on Thinkific sell more and more easily manage and measure their business.

We continue to bring new features to market with growing a suite of integrated business management and payment solutions. Most recently, we launched Buy Now, Pay Later, powered by Stripe and offered through a firm Klarna and Afterpay. Buy Now, Pay Later allows creators to sell higher-priced products while providing their students with more flexible payment options. Buy Now, Pay Later transactions on Thinkific were 40% larger than average during an ongoing beta program, evidence that Buy Now, Pay Later helps creators sell higher priced products and increase their ability to sell and earn more.

Localized pricing is an addition that makes it easier for creators on our platform. In both the U.K. and EU, we have introduced pricing in local currency rather than U.S. dollars, removing a barrier for new creators to get started in these countries. And we didn't stop there. We've also launched Thinkific Analytics, which includes a suite of new dashboards that provide valuable insights to creators, helping them earn more and provide more impactful learning experiences. The analytics tool offers superior performance and usability, including data on enrollments, orders, revenue and course engagement.

Early in Q2, we launched our mobile apps. The reception has been strong, and as a result, we are broadening Branded Mobile, our customizable solution to be available as an add-on for all of our paying customers. Some of the reasons creators are choosing the Branded Mobile solution include incremental revenue via in-app purchases, acquisition of new students via the App Store and the Play Store, brand and reputation building through a customizable look and feel and of course, improve student engagement in both courses and communities via the mobile experience.

Customer success as well as product and technology innovation are key, but as a business, we must also ensure that we are run efficiently and ultimately, profitably. And we are doing this without losing focus on the importance of continued innovation, which includes working with AI to empower more creators as well as our recent launch of our mobile apps, which I just mentioned.

To sum it up, we're pleased with the progress we have made in our key metrics, the successful launch of Mobile, along with continued advancements in our core platform and payments offerings. We're excited to launch The Leap and believe it solves a key barrier for new creators. We are executing on the path we laid out for ourselves late last year and are encouraged by the progress to date. Over the past several quarters, we have reduced our expense run rate, increased our revenue per employee and improved marketing efficiency. We look forward to the sustained, consistent execution of our plan to deliver both growth and profit.

Now to speak about our current results in more detail, I'm going to turn the call over to Corinne.

[Corinne Hua, executive]

Thanks, Greg. Good afternoon, everyone. We were pleased with the second quarter results. We not only beat the high end of our range of revenue, but also exceeded expectations on our path to profitability where we beat the midpoint of our EBITDA guidance range by 50%. We're seeing momentum across all our KPIs, specifically growth in average revenue per user per month and the success of Thinkific Payments and our growth in servicing businesses with Thinkific Plus. Our unrelenting focus on strategic priorities, including helping creators get started, helping more customers sell more and growing upmarket is yielding results.

In the second quarter, revenue came in at $14.4 million, a 14% increase compared to the previous year. This was driven by customers adopting higher tier plans, including Thinkific Plus and I want to specifically call out the increase in expansion revenue this quarter from features like Branded Mobile and the continued success of the Thinkific Payments. Payments revenue growth is unique because of both increases the average revenue per user and the lifetime value of a customer without increasing the customer acquisition cost as our customers' businesses grow, Thinkific grows.

We continue to see strong quarter-on-quarter growth in ARR, increasing $1 million this quarter to $15.3 million, with steady gains and a stable base, specifically driven by Thinkific Plus, and we are encouraged by the opportunity to grow up market. We ended the first quarter with over 34,300 paying customers, an increase of 3% compared to last year, building on the increases we saw both in Q4 and in Q1. Moving to ARPU or average revenue per user. ARPU grew to $141 per month in the second quarter, up 12% year-over-year. Thinkific Payments and Thinkific Plus were key factors here. We believe that ARPU will be a near-term driver of our business as customers join our platform and adopt additional products, like Thinkific Payments and Branded Mobile.

Now let's dig further into Thinkific Payments. This is an important growth lever for our business with both short- and long-term upside potential. In Q2, we achieved 30% penetration, optimal penetration rate in Q1 of 26%. 30% penetration was our original target for this business line, and we achieved, this is a nice new milestone. We believe we have further runway here. And our primary market of the U.S. and Canada, more than 75% of our customers earn their first dollar on Thinkific Payments. These customers will leverage that first dollar into many more, creating a cycle of ongoing success for themselves and they can get it at the same time.

Gross payment volume, or GPV, which is the total value of GMV profit on Thinkific payments, was $31.4 million for the quarter compared to $14.3 million in Q2 of '22. Quarter-over-quarter, GPV grew by over $2 million. Our take rate on GPV is 3.6% and our margin on those ranges between 25% and 30%. For example, for every $100 of GPV, we earned $3.60 of revenue and a margin of roughly $1. As we continue to add more tools that reduce the complexity for our creators and students alike, the attractiveness of this platform grows.

In the near term, we have exciting new features, some of which are in beta, including Buy Now, Pay Later, additional payment methods, complete sales tax management and the embedding of Stripe app store in our platform. Our priority here is to deliver features that give our creators all the commerce tools they need to build their businesses and to remove any necessary administrative burden. Features like these will increase our take rate and improve our margin.

GMV overall was at $106 million, our highest ever for the second quarter. Customers experienced growth broadly across our customer base, and it was a combination of both more customers monetizing for the first time and existing customers experiencing a higher average transaction size.

Moving now to our P&L. As mentioned earlier, our revenue grew 14% year-over-year to $14.4 million. This exceeded the high end of our guidance range of $14.1 million to $14.3 million and was driven by strong expansion revenue, which was in turn driven from add-ons like Thinkific Payment and Branded Mobile along with stable retention of our largest customers.

Gross margin at 75% was slightly lower than the 76% gross margin recorded the same quarter last year. This was the result of continued success of Thinkific Payments, which carries a structurally lower gross margin in the 25% to 30% range and nonrecurring transitional costs in the customer support team as we continue to move towards a more efficient model. Our subscription gross margin was just below 80%, largely in line with last year.

Our focus on cost efficiency and operational leverage continues and as a new proof point along these lines, we've recently crossed an important benchmark, breaking through the $200,000 in annual revenue per employee. We believe we have the right team with the mindset to grow our business, drive product innovation and deliver on our cornerstone with helping customers reach their highest levels of success.

Sales and marketing expense decreased year-over-year by over $1 million or 15% and was $5.5 million in Q2 or 38% of revenue. Let's just pause here for a minute because this is quite an important point. We've been able to hold and expand our customer base, drive significant improvements in ARPU and launch a slew of new products and features, all while significantly decreasing our costs.

Turning to R&D, a reduction year-over-year of $2.2 million or 31% to $4.9 million was achieved due to our laser focus on ROI and properly aligning our R&D teams to the projects, which will have the most impact to our customers. We achieved this reduction in expense and continue to produce high-quality in-demand products like mobile features, commerce toll like sales tax management as well as new analytics features on our platform.

General and administrative expenses came in at $4 million, which was flat compared to last year. And we continue to focus on growing the top line while making progress towards adjusted EBITDA breakeven, we made significant progress again this quarter. Our adjusted EBITDA loss improved for the fifth consecutive quarter and in the second quarter was $1.2 million, which is an 83% improvement compared to Q2 of last year. You'll find a summary table of the calculation for adjusted EBITDA in our press release, MD&A and investor presentation on our website.

Turning to our balance sheet. Our cash and cash equivalents on June 30 was $84.7 million with no debt. We believe the strength in our balance sheet in combination with our declining cash requirements for operating needs is an asset that provides us with the stability and the flexibility to execute on our long-term strategy. Our relentless focus on managing our cost structure and maintaining our path to profitability should result in us exiting 2023 with a profitable adjusted EBITDA run rate, benefiting from both top line growth and a continued reduction in our cost structure.

For the third quarter of 2023, specifically, we expect revenue in the range of $14.5 million to $14.7 million and adjusted EBITDA loss in the range of $0.6 million to $1.2 million. While ARPU is a key driver of our top line growth in 2023, executing on our strategy of supporting creators getting started and earning their first dollar, enabling them to sell more on our platform than anywhere else and helping businesses find success with the features and services available on Thinkific Plus will position us well for long-term growth and sustainable profitability.

And to wrap up the call, I'll now turn it back over to Greg.

[Greg Smith, executive]

Thank you, Corinne. In closing, we are executing on our strategic priorities and getting very close to our profitability target. We are truly bringing everything together with the successful launch of our mobile apps, our impending launch of The Leap, the use of AI, both in our business as well as to support creators, business tools like Thinkific Payments and Thinkific Commerce as well as analytics to help creators sell more and the continued growth of Thinkific Plus. All of these underscore our confidence that our path is the right one. And we're doing all of this as a more streamlined organization.

We will now take your questions. Thank you.

[Operator]

[Operator Instructions] Your first question comes from the line of Thanos Moschopoulos from BMO Capital Markets.

[Thanos Moschopoulos, analyst]

Greg, just expanding on The Leap. I apologize if you referenced it, but when would you expect the launch to happen? And just to provide more color in terms of the implications, is this basically about making it easier for moving to that latency in terms of people thinking about launching courses versus going ahead, doing it, and this is kind of a way to help bridge that gap and accelerate that process? Or how do you think about the implications?

[Greg Smith, executive]

Thanks, Thanos. Yes, great question. So The Leap really started out about a year ago as more of a media property really starting to validate a segment of our TAM, and we saw a lot of opportunity there in terms of people who are a little earlier in the journey. And in part of validating that, we saw both that there's a large audience there for us to help but also that, that group, in particular, all of our audience, I think, struggles a little bit with this. But that group, in particular, I think, struggles with getting their first product built up and running and making that first sale.

And so a lot of what The Leap is about, especially with this product that's coming out in September. And it's currently been released to a small group of customers and playing around with good results and so a broader release in September. But what that will do for them is just make it really easy for people who have some level of existing audience, so they're not starting from zero, but there's a significant number of people who have some kind of audience and they're looking to get something launched and built monetize that audience and giving them the tool to build a product very quickly and easily and immediately start monetizing that audience without having to go through the much longer journey of what would conventionally take building out a course or a larger product and going to market with it. Does that cover what you're looking for?

[Thanos Moschopoulos, analyst]

And so -- yes, I think it does. And there's a kind of a separate pricing structure for this relative to the platform? Or is this kind of like [indiscernible] of the platform, how do we think about the pricing?

[Greg Smith, executive]

Yes. So it's -- we're offering it initially as an entry point that is free and then there is monetization opportunities within that as well as the ability for people then to upgrade to the full Thinkific platform. So it's connected into the platform in terms of, say, customer journey, but does have a sort of stand-alone pricing initially as well.

[Thanos Moschopoulos, analyst]

Okay. That makes sense. In terms of the payment penetration, I presume it's still the case that the ramp is driven predominantly by new customers. Any traction as far as converting the existing base? Or is the focus really more about just ensuring you have a good attach rate on the new ones?

[Corinne Hua, executive]

That's a good question to ask. We have seen really good uptake from new customers, but also continuing to see more and more from the existing customer base. The key has been releasing new features that are unique to Thinkific Payments and things like Buy Now, Pay Later and now our new sales tax management solution is a big opportunity for us to do just that. So I think we're seeing some good [ growth ], I think there's more opportunity there.

[Thanos Moschopoulos, analyst]

Okay. And then as far as new customers coming to the platform, are you seeing any changes in terms of customer type sort of kind of the verticals and question anything in that regard? Or is it kind of consistent with prior trends?

[Greg Smith, executive]

Pretty consistent. And in fact, we're excited as well by sort of what we're seeing on the success of customers, the acceleration of growth in GMV over the last 3 quarters and expecting that acceleration to continue into Q3. And when we looked within that, we looked at is this different vertical segments, customer sizes, customer types, and we're really seeing that success happen across the board. So we have more people monetizing and more transactions. One thing that hasn't shifted across the majority of customers is the size of the transaction or order value they're processing. So it's really more people and making more sales.

The one place where we are seeing the average order value increase is in the people who are using Thinkific Payments because that's where we have those features like quarter bumps and other things we've released that are actually helping them drive up the average order value. But then sort of as an extension of that and back to your original thing in terms of customer acquisition, not really seeing a change in industry demographic of customers overall except more in The Leap, as we talked about is a lot of that right now is more people who are a little earlier in the journey. But I think the opportunity there as that product matures, it will also be a place that even more mature customers can utilize the benefits of that tool as well.

[Operator]

Your next question comes from the line of Todd Coupland from CIBC.

[Thomas Ingham, analyst]

Greg, it seems like the business execution overall has been steadily improving the last few quarters. You're talking about a stable staff base and good blocking and tackling across the platform. What is that doing to culture and I guess, focus on what that says to future periods? How are you thinking about that?

[Greg Smith, executive]

Yes. I think culturally if I'm totally honest, it's still a big shock to the system in a company like ours to have layoffs at all. And so even when we bring that up and say, how do people feel about that, there's still a little bit of a small cultural hangover from that, just if I'm being honest about the sentiment within the team. And we're very aware of that, and we continuously and have always taken an approach of kind of continuous innovation on culture. And so what that looks like for us is asking and then responding and figuring out what we can do to continuously improve our culture.

Part of that is as we add new people to the team, we see it as not always just fitting in, but what do you bring and what do you add to the team. And so as we added new leaders into the team, they brought in new improvements to the culture, but also just feedback from the team. So like all areas of our business, it's an area that faces continuous innovation and improvement. And really, that's just by our customers in that sense, our teammates and asking them what we can do to improve.

So overall, though, the sentiment is up, I think what the team is seeing is that we're delivering -- I think, the excitement within the team very much so about us our alignment here of reaching this goal of profitability and what that can unlock for us in terms of our balance sheet and our continued investment in growth is really exciting.

So overall, sentiment is up. I think it also gives us confidence that we're on the right track strategically. And then there's a lot of really exciting things we're working on, combined with the fact, I think, culturally that by one of the benefits on slimming down the overall organization size and team size is that in many ways, we become a lot more efficient in some of the things that we are doing. And so I'm super impressed with the volume that we're producing, especially on, say, the R&D side with the smaller team that we have. So that's been impressive and I think really encouraging for the team. I think it opens up a lot more doors for what we can do in the future with tools like AI.

[Thomas Ingham, analyst]

Great. That's helpful. Secondly, I wanted to ask you if you could sort of step back from the KPIs, the payments in the quarter. What is -- you've hit your goal now for attach? What's the potential for payments attach and take rate as you think about the product road map for features? What could that look like in 2 or 3 years?

[Corinne Hua, executive]

Greg, why don't I take the first part of that question and I'll let you take the innovation side of it. So opportunity going forward, we're really pleased with hitting 30% so early in the launch of this product and believe there's still a kind of upside, seeing upwards of 75%. And our key target geographies is really encouraging to us and that probably gives us a sense of how far we can take this, and we're really now focused much more on how far can we grow our take rate.

As I mentioned in the prepared remarks, we're sitting at a 3.6% take rate, but have a few things that we've got in beta that will continue to drive that up and we see an opportunity for us to grow as high as 5% in the near term. So we're excitable what the opportunity is there.

I'd let Greg talk a little bit about new product features coming to market.

[Greg Smith, executive]

Sure. Thanks, Corinne. Yes, so Todd, to your question about the longer term, where we see that going, I think Corinne highlighted that seeing the attachment rates of 75% to 80% shows us where we could take it in terms of overall penetration. I think there's further we can go beyond that even that there's -- as we've talked about before with GMV, there's a whole bunch of payments being processed that are not currently recorded within our GMV that we could bring back in as we grow the feature set that we offer and people see more value in kind of an integrated payment solution that has all the features they need, and we're seeing a bit of that already.

And then in terms of the take rate, I think because of the nature of our industry, the fact that most sales, the majority of -- the margins of our customers are so much higher than when selling physical products, but the digital products have really high margins. And so the appetite for us to have a take rate is quite strong. So I think in the future, we're looking at 5% to 10% take rate there. And -- but the way we're doing that and looking at that is we want to give value for value.

So we really want to be able to contribute features, things like order bumps, in-app transactions within mobile apps, things like bulk selling and the ability for our customers to go and sell bulk licenses in their programs where we're helping deliver revenue to them that they otherwise wouldn't get in a way that is unique to the Thinkific platform and that allows us the opportunity to have a take rate within that transaction.

So we bring them new revenue, and we're happy to provide a piece of it to us. And so that's what allows us to think to get both really high overall penetration but also a much higher take rate than what you'd see in other industries.

[Thomas Ingham, analyst]

Great. And then my last question is on AI. Lots obviously discussion the past few months in the overall market, do you see existing customers being able to use this either to make their businesses more efficient or just drive a better customer experience? Or is this something that's going to take a while? Maybe just talk about your early thoughts on how this is going to get used.

[Greg Smith, executive]

Sure. Thanks, Todd. Yes, on the AI front, there's a few things. So there's a combination of sort of short term, midterm, long term for us. There's a few things we've already done. So we have some tools around building products and courses using AI. We have some marketing tools around AI that are just available publicly on our website. We have now a funnel building tool using AI to build sales funnels. And some of these are in beta releases right now, so a smaller subset of customers using them and a larger release coming shortly. The Leap product has an AI built into it that allows people to launch products much faster. So that's a fun one for people to play around with.

And there's a lot more in the works leveraging our proprietary data. On that front, I was just speaking with some of the engineers on the team there. We are being very measured in our approach and moving as quickly as we can, but being careful about the thing. We have heard stories of other companies who moved too quickly in it and had to dial back in part because of the cost of supporting servers. So there's a certain way of how we can support our store, things like text and the volume that we store and how we use the data here that can keep costs under control while ensuring that we deliver customer value.

So I'm really impressed with the way the team is taking AI forward and that we have some really quick wins that customers are using today, and we have a lot more coming kind of each quarter looking out into the near and long-term future that I think is going to be very exciting and transformational in terms of how customers are able to both build new products, make their first sale, make more ongoing sales and just generally manage their business in a much easier way with some of the tools we're able to give them.

And then, of course, with the proprietary data we have from millions of students who have gone through all of the products that we have on Thinkific, combined with the tens of thousands of creators and all of the things they've created, we can look at that and then recommend best practices to our customers over time to help them improve their businesses. So really excited. And for those who are playing along at home, I'll just throw the word AI one more time because it's very exciting about our future.

[Operator]

Your next question comes from the line of Rob Young from Canaccord Genuity.

[Robert Young, analyst]

First question for me would be on the incremental $1 million of ARR in the quarter, which I thought was notable. Is there any onetime items that would be a driver there? Or is there any seasonality to think about in this quarter that might have driven this quarter. I remember a few quarters back; you had some price changes that bumped ARR. Is there anything notable in there to understand?

[Greg Smith, executive]

Not that I'm aware of at the moment. No, I don't think so. I think we want to continue to drive that up further into -- over the midterm to accelerate that. So we've seen 3 quarters in a row now of incremental growth in the amount of ARR that we're adding. We did have about 5 quarters ago, a onetime pricing moment that had a bigger bump in ARR. If anything, the lagging impact of that has actually slowed a bit of our ARR growth, but we've managed to continue to grow it from there just because we pull forward some revenue into that quarter.

I think there are opportunities for us to continue to improve our pricing and packaging in the future that could actually accelerate ARR growth, not so much in onetime bumps but more in terms of ensuring we align our success with the success of our creators and that is allowing us to grow with their success and alongside them for a slower but consistent ARR addition over time and nothing seasonal this quarter.

[Robert Young, analyst]

Okay. Okay. And then my second question would be around the trend in free to paid conversion. I see you added customers -- incremental customers in the quarter. Is there any trend to call out in the churn metrics between free and paid or -- maybe if there's any insight you can give us on the growth in the free premium customer side? Any color there would be helpful.

[Greg Smith, executive]

Yes, I do watch that and nothing to call out and that our churn has been relatively consistent as has been our conversion free to paid. I do think there are opportunities in both of those and one way we're leaning is really our monomaniacal focus within the business is how do we help more creators to sell more. And as long as we're doing that for them, that should drive a reduction or an improvement in retention and also an improvement in acquisition and conversion to pay because it's a great story to continue to be telling that you sell more through Thinkific.

And I think we're seeing that start now with a lot of what we've released on Thinkific Commerce, where we're seeing people who are taking advantage of our Thinkific Commerce features built on Thinkific Payments are actually seeing larger transaction sizes. And so that's exciting to see because I think as we start to go to market with that, that will create more and more opportunities for us to change our conversion rates and improve our retention as customers see more success.

But up to today, we haven't seen a real -- those metrics have been relatively steady, which is still a good thing for our business because they're in a good place, but it's always a place that we want to improve upon.

[Robert Young, analyst]

Okay. And then I think you mentioned a couple of times the call some data points around Thinkific Plus. I think I mentioned -- I think you called it out as a key driver of ARR growth in the quarter? And maybe if you can just give us a sense of the relative size if possible, but any thoughts around how much of a driver Thinkific Plus in the quarter and then maybe over the next year?

[Corinne Hua, executive]

I'll take that question, Rob. Plus has been a great driver for us in the last few quarters. And I think there's a ton of upside. These are really sticky customers with strong retention, and they are many of our largest customers. And while the overall transaction doesn't make them specifically material in any one case, there's still large -- a lot of large customers there. The total Plus business is quite small from a customer count perspective, but about 20% to 25% of our total revenue and is really moving the needle on ARR revenue growth and then we're seeing that success come through from an ARPU perspective.

So I think there's still a lot of opportunity for us to grow in this market, and it continues to be a good driver for us going forward.

[Robert Young, analyst]

Okay. Last question for me would be around the Buy Now, Pay Later. I think in the release, you said that Stripe [indiscernible] suggested there's a 25% lift on average. Did you give any data on that in the prepared comments on the beta? And then I'll pass the line.

[Greg Smith, executive]

Yes, I don't think we've actually -- I can speak to it. We're seeing a bigger lift than the 25%. And it's fluctuated a lot while running the beta, but generally, it's been either much higher or slightly higher than that. So currently, I think the numbers are -- and it is a beta project. So -- but we're getting to strong statistical significance in the sort of 30% to 40% range or 35% to 40% range in terms of lift in transaction size. So that's been really exciting to see.

And then, of course, across all the features we've offered with Thinkific Commerce seeing good results of increasing transaction size for the customers who were taking advantage of those feature set.

[Operator]

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

[Richard Tse, analyst]

On the Buy Now, Pay Later, and I suppose this is probably applicable to other sort of financial products. Do you have to be on Thinkific Payments to access that product?

[Greg Smith, executive]

Right now, yes, I believe that is the case. Corinne, would you correct me if I'm wrong there?

[Corinne Hua, executive]

You're correct. It's one of the features I think.

[Richard Tse, analyst]

Okay. Great. And then just, Greg, I wonder if you can maybe update us a little bit on the competitive landscape over the last 12 months in terms of how it's changed or whether it's even changed at all?

[Greg Smith, executive]

Yes. In terms of, say, market share, I haven't seen a big shift there. It seems to have relatively been holding steady in that sense of it and haven't seen a lot of new entrants into the space or much in the way of new entrants in the space that we've become aware of. So there hasn't been a real shift in our data in terms of how we're perceiving that. We are seeing strength on our side in terms of overall brand recognition and SEO, which has been good. And I think that's a lot of strength in our go-to-market team and a lot of the work we're doing on the SEO front. So thanks for the crew there but no major shift in terms of what we're seeing in terms of competitive trends.

[Richard Tse, analyst]

Yes. Like sort of in a related question, if your currency were stronger, do you think there's an opportunity here to kind of consolidate the sector a bit given it is quite a initiative to build some scale?

[Greg Smith, executive]

Yes, definitely opportunities for that. I think you're right, there is a potential currency issue there depending on the size. I mean, we do have a strong balance sheet. So depending on the size of the player in the space, our balance sheet might be sufficient. And then, of course, continued improvement in our share price starts to unlock more opportunities. And as a good board, we always and always have been exploring all opportunities in terms of what we could be doing there to continue both organic and inorganic growth.

[Richard Tse, analyst]

Okay. And then with respect to the app store, I kind of noticed that there wasn't really much discussion in your release or the MD&A on that. Is there any update there?

[Greg Smith, executive]

Yes. Honestly, really impressed with the volume of work our R&D team has been releasing. And so there was a moment in our -- preparing our disclosure where we sort of had to figure out where -- what are we going to focus on in terms of sharing. There is continued innovation on our API in particular, which is what powers that app store. And so we're seeing a lot of improvements in terms of the API we are offering, the endpoints we're offering, how we're offering at some of our movements towards [indiscernible], which is a better technology in terms of how we offer that out to app developers and customers to use it and some further improvements we're working on in terms of access to the API.

So there's a lot of work that is continuing to go on. That work also empowers us in other areas, both internally, even in terms of how we unlock features we can build with AI and other features that our teams can use. So lots of improvements there. We just didn't have one particular launch or release to focus on this quarter, but I expect we'll have more in the near term to talk about on that front.

[Richard Tse, analyst]

Okay. And just the last one for me. Thank you for providing the guidance and sort of the outlook for the remainder of the year. Just from a modeling perspective, Corinne, I'm wondering if you could help us kind of parse out the stock-based compensation here for the remainder of the year.

[Corinne Hua, executive]

I was wondering if I get a question on that. It's a good question. We did have higher stock-based comp expense in the quarter than we had previously, and there was a few reasons for that. So you can think that would a bit of a high-water mark right now, and we'll see it come down slightly over the next 2 quarters we get towards year-end, but nothing material. It's more of a very slight decline.

[Operator]

Your next question comes from the line of Martin Toner from ATB Capital Markets.

[Martin Toner, analyst]

How has customer growth trended so far this quarter?

[Greg Smith, executive]

So you're looking for in terms of Q2 reporting on customer growth or looking forward into projecting for Q3?

[Martin Toner, analyst]

Yes. Just how -- just I just wondering if you can give us a little update on how Q3 has gone so far?

[Greg Smith, executive]

Yes, sure. So looking into the future in terms of this, and I don't want to give guidance on numbers that we haven't given guidance on, but we do typically see a little bit of seasonality in the summer with the entrepreneurs being slower in their starts in July and August. So this year is no exception to that. But then we often see recovery that outbalances that coming in September, and we have plans around our go-to-market for September that should see a similar result there.

So expect to see sort of similar results as we've seen in prior Q3s based on some seasonality in July and August and as well as the resurgence in September with sort of -- it's not like we're an education back-to-school concept, but it does seem to have this sort of back-to-business September bump for us. So expect to see something similar there across the quarter and then projecting further into the future, I think from what we're seeing from our go-to-market, the products we're releasing, we expect to continue to grow customer count. And I think there is opportunity in a lot of the things we're releasing in terms of both Mobile and The Leap and a lot of other products or product improvements that should start to unlock even further customer growth beyond the steady but relatively nominal improvements that we've made over the last few quarters.

[Operator]

[Operator Instructions] Your next question comes from the line of Gavin Fairweather from Cormark Securities.

[Graham Smith, analyst]

This is Graham on for Gavin Fairweather. So my first question is on the progress towards breakeven. So you guys have it pegged for the end of this year. I'm just sort of curious on the trajectory of margins after you guys hit breakeven. So should we expect those margins to rise naturally? Or will you see maybe a bit of an increase in investment that might moderate that margin trajectory slightly?

[Corinne Hua, executive]

We're really pleased with the progress that we've made towards hitting breakeven and have been looking out further in terms of how we're structuring our business. And we're very top line focused from a growth perspective. But from the beginning of the history of the business until the IPO, we always kind of ran it at profitability kind of around breakeven.

And so I consider us doing that as we go forward. We have been looking at kind of like low to mid-single-digit profitable like adjusted EBITDA margin rates. And so it's kind of been where our mind has been at. But we want to be able to save room for us to invest in opportunities ahead of profitability if something was to come up that has a near-term ROI. But it would have to be some exceptional for us to go back into a loss position. We do plan to continue to run the business in a profitable state.

[Graham Smith, analyst]

That's great. And then just a second question on Payments. So you saw the Payments penetration rise this quarter. So we've seen some peers announce a surcharge on this third-party payments. Just wondering if you have any thoughts on this as a lever to drive Payments adoption.

[Corinne Hua, executive]

We do have a number of levers available to drive Payments adoption, including what you've mentioned and other things. I think the real focus that we have today is to really deliver value to our customers and then we're sharing in their success as they benefit from the value we've provided. So things like Buy Now, Pay Later, our sales tax management tools, both give us the opportunity to attract people to Thinkific Payments and then provide value where we can increase our take rate. And so that's our near-term focus, like you mentioned, there are other levers that are always available to us, but really want to leave with value to our customers.

[Operator]

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

[Daniel Chan, analyst]

I just wonder if you could share with us how the economics on the Buy Now, Pay Later works. You've got quite a few partners in there. So just thoughts on how you guys are sharing that revenue.

[Corinne Hua, executive]

This is a product that we're leveraging through Stripe, and I just can't say what a great partner they are in terms of building a really powerful road map for us to continue to share in the opportunity there. We earn an additional take rate on the Buy Now, Pay Later transactions. And it's -- it helps increase us above the 3.6%, but not significant, not like something we built ourselves. And we do share in some of that with Stripe as well as the other partners. So you can imagine there's a few players in there. But the pricing is no different than you have anywhere else, so it's market priced.

[Daniel Chan, analyst]

Okay. And then your margin came in better than you're expecting. I think it's been a few quarters you've done that now. What were the key differences between what materialized throughout the quarter and what you're expecting at the beginning?

[Corinne Hua, executive]

When you're saying margin, you're saying EBITDA margin, not gross margin, right? Just to confirm the question you're asking.

[Daniel Chan, analyst]

That's correct.

[Corinne Hua, executive]

Okay. I kind of assume. So there have been a number of things that have been helpful, but probably the most important one, though, is our whole team is really focused on driving towards profitability. And so across the company, we're seeing lots of people taking on projects that just help us move the needle forward every single quarter. And that really speaks to the power of transparency for the team and what the goal is and getting everyone aligned in what we can do.

So majority has been a whole bunch of smaller projects. Things worth calling out is the work we've done on our hosting costs. Our R&D team has done just a great job of helping us bring those -- into a much healthier, more efficient process, but also just a whole bunch of things across the board in terms of how we're seeing contracts and how we're looking at delivering value to our customers. Sometimes that value improves the bottom line as much as it improves the top line. And so a whole bunch of things across the board. We have benefited from some significant beats on that. As we get closer to breakeven, little numbers, little projects can move the needle quite significantly. And so I wanted to careful that we don't get ahead of ourselves in terms of expectations, but we are on track to have a breakeven run rate at the end of Q4 to have breakeven. So we're on track for that path.

[Operator]

There are no more questions at this time. I will now turn the call back over to Greg Smith for closing remarks.

[Greg Smith, executive]

Thanks, JP, and thanks, everyone, for sitting around for our call. Just a few things to highlight here as we look forward. We've been able to expand our customer base, drive significant improvements in average revenue per user and ARR increase our payment penetration, launch a variety of new products and features to help our customers and do all this while significantly decreasing our cost and with a smaller team. We've got a strong outlook for Q3, showing continued strength and consistency in our results.

We have significant product improvements that have come in yet to come even with a smaller team. Our customer count is showing steady growth, and we have near and midterm opportunities to accelerate this. We continue to add increasing amounts to ARR over recent quarters. Our GMV is 3 quarters of accelerating growth, and we expect that to continue in Q3, showing the success in our customer base. Our EBITDA improvements continue to track towards profitability and our payments attached and ARPU growth are strong.

In summary, we've dramatically cut cost to reach profitability while continuing to grow. We have a strong balance sheet with profit in sight and so we can lean into more growth initiatives and I'm personally very excited for the future of Thinkific.

Thank you all for coming.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.