Thinkific Labs Inc

TSX:THNC

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon. My name is Constantine, and I will be your conference operator for today. I would like to welcome everyone to Thinkific's Third Quarter Fiscal 2024 Financial Results Conference Call. [Operator Instructions]



I would now like to turn the conference call over to Joo Hun Kim, Head of Investor Relations. Please go ahead.

[Joo Hun Kim, executive]

Thank you, and good afternoon, everyone. Welcome to Thinkific's Third Quarter Fiscal 2024 Results Earnings Call. Joining me today are Greg Smith, CEO and Co-Founder of Thinkific; 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, 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 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 different manner to similar key performance indicators used by other companies.



I would also note we have a slide deck that will support our remarks available to download on the webcast interface on our website.



And finally, all dollar amounts discussed today are in U.S. dollars, unless otherwise indicated.



I will now turn the call over to Greg Smith, CEO and Co-Founder of Thinkific.

[Greg Smith, executive]

Hello, and welcome to Thinkific's Q3 2024 Earnings Call. Thinkific's unwavering commitment to customer success continues to drive strong financial performance. Our customers are benefiting from the rapid pace of innovation over the past year, which has led to more customers finding success with Thinkific Commerce and an acceleration of growth in both Thinkific Plus and Self Serve revenues.



During the quarter, we observed a significant increase in the volume of customers finding success with our Thinkific Commerce solution. Penetration rose to 47%, up 700 basis points from the prior quarter's 40%, which accelerated Self Serve to 10% growth in the quarter.



Plus revenue growth accelerated to 32% on the back of our record new customer bookings in Q2. And in Q3, we signed our largest Plus deal to date.



Leap sign-ups grew to 37,000, up from 30,000 reported in Q2, demonstrating strong demand and particularly with social-first creators, who are increasingly looking to monetize their subscriber bases.



Additionally, we are well on our way to stabilizing our Self Serve customer base and improving activation process.



Last quarter, we promised a number of changes in Q3, and we have delivered on each: an acceleration in revenue growth rate; positive EBITDA, and here we've actually over-delivered, with an acceleration; continued positive cash flow from operations; the first steps in improving customer additions; continued adoption of Thinkific Commerce. Additionally, we spoke to improving activation rates for new customers and the improvement we should see in total customer additions.



I'm pleased to share that the work started in Q3 is already showing early indications of success. I remain confident it's a matter of "when," not "if," we'll see the acceleration of customer additions in ARR. I still expect this to be a multi-quarter time line to see real results here. This quarter did see an improvement from Q2.



Q3 saw the continuation of customers choosing and seeing success with Thinkific Commerce. The feedback has been overwhelmingly positive, with many customers sharing how Thinkific Commerce has boosted both their sales volume and transaction sizes.



I shared previously that customers leveraging Thinkific Commerce experience transaction sizes that are 22% higher compared to those not using Thinkific Commerce. With the continuous enhancements and new features we are adding to the platform, this has now increased to 31%. That means that for those who choose Thinkific Commerce, their transactions are, on average, 31% larger.



This is great news for anyone choosing Thinkific Commerce and is a direct result of our commitment to helping our customers sell more. One such customer who made the switch to Thinkific Commerce this quarter was a firm that helps their students pass electric power engineering exams. They were committed to an IT strategy of using best-of-breed solutions: Thinkific for learning and a third-party vendor for payments. When they saw the ways Thinkific Commerce can better support their specific use cases, improve customer experiences and increase their sales, they chose to transfer over $1 million in GMV to Thinkific Commerce. Thinkific Commerce truly is now the best-of-breed solution for our customers to help increase their sales.



We continue to have high levels of engagement with our customers on the value Thinkific Commerce delivers and ended the quarter with 49% penetration. This gives us confidence we can carry the momentum through Q4, which is a critical time for many of our customers.



Q3 was an exceptional quarter of growth for Thinkific Commerce. And while I expect the growth to continue, net increases going forward will likely be more in line with prior quarters, with Q3 as a standout.



Looking ahead, we will also continue adding features that enable our customers to sell more. Specifically in Q4, we plan to include custom invoices, abandoned cart retargeting, enhanced landing pages to help drive student engagement and payment support for ACH, automated clearinghouse.



The ACH payment option and invoice enhancement are particularly exciting, as this will allow us to expand into the total customer sales space, which can both help our customers sell more as well as increase our gross payments volume.



ACH and invoicing are also interesting for expanding Commerce usage to our Plus customers, who are larger and often process larger volumes of payments on methods other than credit cards. Given the robust growth we are seeing in Plus new customers, we believe this can be a material driver of GMV and Thinkific Commerce growth in the future. It will also improve the value we deliver to our Plus customers.



Q3 was a remarkable quarter for Plus, with top line growth accelerating to 32% on the back of the record new customer bookings in Q2.



We also signed our largest deal to date, with a large heavy equipment company that has over 30 locations across North America. Our Commerce features were of particular interest to this new customer.



While Plus has traditionally been popular with learning academies and training centers, we see a very large and untapped market opportunity with businesses that are looking to extend learning to their own customers and partners, often as a new revenue stream. This company has a revenue-generating training division that teaches customers how to safely operate and maintain their full range of machinery. By doing this, their customers get the most out of their purchases, come back for future purchases and become better brand advocates. They chose Thinkific because of our proven, scalable and secure platform with out-of-the-box flexibility and customization capabilities.



This contract is a landmark not only for its size, but because it was sourced and won with the help of an integration partner, a distribution channel which we plan on leaning into as we expand Plus.



[ GORM ] also continues to be a driver of new customer acquisition and despite having only been available for a relatively short time has already brought in 27 new customers, acting as a critical growth factor in growing new ARR since its release.



Last quarter, I told you we were going to increase headcount in our Plus sales team. That process is now complete. While it does take some time to fully ramp new hires, this is an area of strength for us, and I'm pleased to share that all the new team members have already managed to close new deals. Congrats.



The overall level of engagement remains high, and we had solid deal flow through the quarter. We have also built up and qualified larger opportunities we believe we can capitalize on in Q4, and I'm confident we can continue to grow Plus at levels consistent with prior quarters.



Self Serve had a solid quarter and was up a little over 10% year-on-year on the back of strong growth in Thinkific Commerce revenue. As expected, we did a better job of managing the timing of promotions and other marketing efforts and the impact those have on paying customer count and ARR.



We rolled out a suite of AI tools that address common challenges faced by our customers, such as driving impactful sales and marketing initiatives when they don't have previous experience in these specialist areas. The AI tools were part of the improvements to the Thinkific onboarding experience, making it easier than ever for customers of all types to sign up and start with Thinkific.



It's still early, and I still expect this to be a multi-quarter initiative. However, the leading indicators are moving in the right direction, and we are helping a greater number of our customers successfully launch and sell their digital products and earn their first dollar sooner.



One recent launch that has met with remarkable success is the enhanced digital downloads feature rolled out in Q2. We had a new customer monetize their 50,000-person newsletter list within 24 hours of signing up to Thinkific.



Although it's only been a few months since our Chief Product and Technology Officer and Chief Revenue Officer, Ryan and Amanda, joined, they have already spent considerable time strategizing on the revitalization of Self Serve, and I'm really excited about the fresh ideas and new perspectives they have brought to the table that we plan on implementing. Their intelligent insight and incredible enthusiasm is infectious, and we have a slate of improvements already in the pipe.



I'm confident we've identified the problems that held back our growth last quarter and have found solutions to address these. With the improvements we have already made and will continue to make in Q4, I'm more confident than ever in our ability to drive our Self Serve ARR growth trajectory and believe Self Serve, powered by Commerce, will become an important source of growth for Thinkific.



Before I hand over the call to Corinne, I want to welcome Russ Mann, Lori Ell and Paula Boggs to Thinkific's board. They bring valuable experience and perspectives that I believe will be crucial as we enter a new phase of growth and innovation.



I also want to thank Steve Krenzer and Katie May for their tireless dedication over the years as they retire from the board. Their many contributions to Thinkific are much appreciated.



With that, let me hand the call over to you, Corinne.

[Corinne Hua, executive]

Thanks, Greg. Good afternoon, everyone.



I'm pleased with our improved execution in key growth areas. In Q3, we accelerated top line growth to 15%, driven by strong performance in both Thinkific Plus, as a result of our strong and growing sales team, and in Self Serve, where revenue accelerated from the prior quarter with the increasing attachment of Thinkific Commerce. We also grew adjusted EBITDA, even while increasing strategic investments.



The strong performance we observed is a testament to the leverage and flexibility we have in our business model and reflects our ability to execute on our strategy of profitable growth as we achieve scale in the business.



Q3 2024 revenue was $17.2 million, up 15% from the prior year, driven by accelerating Commerce and Thinkific Plus growth.



ARPU increased by 13% to $165 per month, versus the 10% and $155 in Q2. The increase was a result of the strength of Thinkific Plus, whose monthly license fees are significantly higher than those in Self Serve, and the higher adoption of Thinkific Commerce.



Subscription revenue of $14.4 million was up 7% year-over-year, and ARR grew to $58 million, also up 7%. Subscription revenue and ARR continue to benefit from the strong new business growth in Plus, up $1 million from the prior quarter. Self Serve ARR was relatively flat quarter-over-quarter versus the decline we saw last quarter, another sign that we are on our way to stabilizing our Self Serve business.



Commerce revenue was $2.8 million, up 88% from the prior year. Commerce revenue growth was driven by the accelerated adoption of Thinkific Commerce, where we saw GMV penetration increase to 47%, versus the 40% in the prior quarter.



Commerce revenue includes approximately $250,000 in transaction fees. Without those fees, Commerce revenue would still have grown strong, at 71% year-over-year.



We exited the quarter with Commerce penetration of 49% and expect this to continue to increase, both as customers adopt e-commerce to access features that drive their success, but also as we release the new features Greg mentioned, which will help us start the adoption process for those processing payments outside of our platform and for customers on Thinkific Plus. We believe these features are key to achieving our GMV penetration goal of 68% by the end of '25.



The take rate was relatively flat, at 4.6%, and we believe we are near the high end in terms of our offtake rate, given our current offering.



GMV, or gross merchandise volume, the total value of commercial transactions of our customers that take place on the Thinkific platform, was $111 million, up 1% year-over-year and flat quarter-over-quarter. This was a result of a hard comparative period from last year and the [ stall in paying-customer ] growth last quarter.



We did not see any wide-scale macro pressure this quarter. And as we have noted before, we have a highly diverse customer base, with no concentration in any one industry vertical, which gives us confidence that we'll be able to weather the storm better than most companies.



GPV, or gross payments volume, the value of commercial transactions that take place on Thinkific Commerce, grew to $52.4 million, up almost 50% from the prior year and up 19% from the prior quarter, despite the relatively flat GMV. This increase in GPV is a result of the accelerated adoption of Thinkific Commerce from the prior quarter.



Now on to revenue by customer group. Self Serve, whose customers are primarily entrepreneurs and creators, saw revenue grow to $13 million, up 10% year-over-year. The increase from the prior year is a result of robust growth that we have seen from Commerce, tempered by a slowdown in paying customers, which grew 1% year-over-year.



Thinkific Plus revenue of $4.2 million grew 32.2% year-over-year, which accelerated from the 28% in the prior 2 quarters. This increase year-over-year was a result of a strong bookings period at the end of Q2 and continued strong deal flow through the Q3 quarter.



We have increased investment in the Plus sales team, which is now fully in place and will be fully ramped and productive in Q1.



I would like to add on to Greg's commentary about the recently released ACH payment option and the support for custom invoices that we'll be releasing in coming months. While Commerce features are native to the Thinkific platform and one of the main reasons customers choose Thinkific Plus, a Plus customer requires Commerce solutions that are more complex; for example, accommodating larger sales group orders and payment options that encompass ACH and custom invoicing.



Moreover, businesses require Thinkific to integrate with their ERP and CRM systems, all features that are on our current road map. We've intentionally built our Commerce growth plan in a staged approach that aligns our growth expectations with our Commerce road map. While today Self Serve customers make up most of the Commerce revenue, our product road map will increasingly solve Plus customers' needs as well and allow us to capitalize on the significant opportunity to expand our GPV.



Moving on to the P&L. Gross margin of 76% was up 60 basis points, helped by an improvement in Commerce and subscription gross margins. Commerce gross margin rose to 41% due to the inclusion of the high-margin gateway fee. Subscription gross margin improved this quarter, but we expect the long-term margin to be closer to 80%, which we believe is a healthy margin for our business model and reflects our focus on supporting customers to drive their success.



Total operating expenses for Q3 were $13.5 million, up 7% year-over-year or $1.2 million from the prior quarter, as the recruitment of senior executives late in Q2 are now fully reflected in the income statement.



Adjusted EBITDA for third quarter was $930,000, or 5.4% of total revenue. Adjusted EBITDA margin was roughly flat to the prior quarter despite the significant increases in operating expenses, due to the leverage from top line growth and increasing gross margin.



Going forward, we will continue to strategically invest in the business, capitalizing on the significant growth opportunities we see ahead, and expect operating expenses to continue to increase. That said, we remain committed to maintaining profitability.



On to the balance sheet. Cash and cash equivalents at September 30 was $50 million, approximately $1.7 million higher than the prior quarter, driven by cash from operations of $2.5 million, offset by funds returned to shareholders through our share buyback program. Consistent with our disciplined capital allocation strategy, we remain committed to returning capital to our shareholders through the NCIB and expect to renew the authorization in the coming days.



Turning to guidance. For the fourth quarter of 2024, the company expects revenue of $17.6 million to $17.9 million, which represents a 13% to 15% growth rate in Q4. The guidance reflects continued strength in Plus as well as positive seasonal effects from Commerce as we enter the holiday season. We plan to maintain adjusted EBITDA profitability while continuing our growth-focused investments through the rest of the fiscal year.



And with that, let me turn it back to Greg for closing comments.

[Greg Smith, executive]

Thank you, Corinne. In conclusion, we're very pleased with our strong Q3 performance. We committed to accelerating top line growth, and we are achieving this in both Plus and Self Serve segments, driven by our robust Commerce solutions and strong sales.



We made significant growth investments, while maintaining our adjusted EBITDA margin and strong cash flow.



Our efforts to improve activation and return Self Serve ARR to growth are bearing fruit. Although it is still early, the progress we observed in Q3 gives me confidence in our future growth opportunity here.



Looking ahead to Q4, we have an array of exciting new features set to launch. These enhancements will continue to simplify the process for customers to start with Thinkific and for those who adopt Thinkific Commerce increase both the number and size of their transactions. Our continued obsession with the success of our customers is paving the way for our future returns.



I'll now turn the call over to Constantine, our operator, for your questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Gavin Fairweather, from Cormark.

[Gavin Fairweather, analyst]

Maybe we can just start on Plus, and you touched on that larger customer. Can you just comment on whether that was kind of a competitive RFP process and potentially the deal size around that customer?

[Corinne Hua, executive]

Gavin, Corinne here. I actually don't know if it was a competitive RFP process because it was brought to us from a partner. And they may have looked at other platforms. I'm not actually aware of that. But what I do know is that they did quite a thorough review and had experience working with our platform to meet that customer's needs. And they fit our platform's abilities really quite nicely. And the opportunity for us to add Commerce to the solution is another upside opportunity for us for this customer.

[Gavin Fairweather, analyst]

I guess, I'm curious, if you look out over maybe the longer term, the next kind of 2, 3, 4 years, do you anticipate that the deal sizes on your Plus offering will continue to creep up? And are there specific things on the R&D road map that you think could unlock that?

[Corinne Hua, executive]

I think we're actually quite happy with our current deal size. We have seen good deal flow over the last 2 quarters. And with customers like the one that you just mentioned, it speaks to the opportunity we have that's sitting kind of right in front of us. We'd love to see it continue to go up, but it's not a strategic part of our plan. However, there's a lot of space for us between us and our competitors for us to continue to build out features that allow us to drive up that ARPU. But today, we're quite happy averaging around $2,000 a month per customer.

[Gavin Fairweather, analyst]

Okay. That's helpful. And then maybe just shifting gears to Self Serve and activation. You touched on kind of a slate of improvements which are in motion. I guess, I'm curious, what do you think is your largest driver to improve the activation rates? And maybe you can provide us with a bit more detail on your progress to attacking that.

[Greg Smith, executive]

I wish it was one simple thing. It's usually a combination of a whole bunch. So there's a variety of factors from our positioning and messaging, which I think there is increasingly an opportunity for us to differentiate in the market. We're seeing the right kind of customers come to us. I think we can just convert more of them better and faster, in part through positioning when they first arrive and start experiencing Thinkific and what we're offering.



Another is the user experience of the initial onboarding of the design, and that's another factor.



And another one is just implementing things like some of those AI improvements that allow them to just accomplish tasks a lot faster when they're getting set up.



So it's a combination of those and a bunch of other small things within the product and marketing and messaging, cleaning up some of these things. Some of these are things where I think we just need to do what we'd consider best practices or bring back things that have worked in the past for us, and others are things we need to take advantage of new opportunities, new technology like AI, to bring in there.



The nice thing is what we're starting to see is the early indicators is that it's working. So we're making a bunch of these changes, and we still have a few more quarters to go of these updates and changes, but the things we've been doing, we're starting to see all the graphs move up and to the right, but they are the sort of early indicator metrics of people sticking around longer, making a little bit further through the onboarding, coming back sooner and more often. Things like that are starting to work.

[Gavin Fairweather, analyst]

Okay. That's great. And then just lastly on EBITDA, pretty flattish this quarter compared to Q2, despite some additional investments in the business. I'm sure you're kind of going through the budgeting cycle and motions right now. I guess, when you look to Calendar '25, do you think you can kind of maintain the current level of margins? Or are there some larger investments that we should be aware of on the horizon?

[Corinne Hua, executive]

Right now our focus really is on maintaining profitability while driving growth. And so I don't think we're going to see significant improvement in EBITDA so long as we're able to really be able to drive that growth.



And we're quite excited by the opportunities in front of us. Greg has been talking just a few seconds ago about what's possible with Self Serve and some of the areas that we're leaning in on. And so lots of opportunity there. And then continuing to build out our road map to help our Plus customers get on to Commerce.



So lots of places for us to invest as we go forward. And that's really our focus, is how do we balance driving the right amount of growth with maintaining profitability. And quite happy this quarter. You take our -- from a Rule of 40 perspective, we're now at 20, a continuous increase quarter-over-quarter. And so I think we're making good progress in the right directions, and the acceleration of revenue this quarter kind of speaks to what's possible for us in the future.

[Operator]

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

[Richard Tse, analyst]

I had sort of a similar question about sort of a few years from now. If you look out 2, 3 years from now, what do you think the mix of revenue will be from Plus? Because it seems like that's a pretty significant opportunity here for you.

[Greg Smith, executive]

Go for it, Corinne.

[Corinne Hua, executive]

Sure. I'll go now, and you can add some color. We see a ton of opportunity in Plus, and I would hate to limit it by saying it has to be a certain percentage of total revenue. And I also don't want to say that there's not a lot of opportunity on the Self Serve side.



And so we're really not as much focused on what the mix is, but driving the right investments to see both parts of our business grow as fast as they can in the market. And I think the real focus is where is the right return on our invested dollar, and that's kind of the focus of how we build up the mix long term.



And there's a lot of opportunity on both sides. And so I would hate to think that one is going to outgrow the other.



Greg, do you have anything you want to add?

[Greg Smith, executive]

That's great.

[Richard Tse, analyst]

And then just on Plus, like, just to clarify my understanding, what's the mix within Plus today that are enterprise customers versus just sort of large kind of independents?

[Corinne Hua, executive]

I don't have an exact number for you, but more and more, we do see the employee size of our customers continue to increase. Our focus and kind of our sweet spot is really kind of 10 to maybe 500 at the high end. The large customer we closed in the quarter puts us above that, and it's quite exciting for us, but our focus really and our sweet spot on the market is probably closer to 5 to 100 employees. So lots of opportunity for us in that. I would consider enterprise much more small business, SMB type sized customers.

[Richard Tse, analyst]

Okay. And then the last one for me. As you have success with Plus, has the competitive landscape sort of changed in terms of who you're seeing now as your mix changes here a little bit?

[Corinne Hua, executive]

In a lot of ways, we do see the same competitor group. A lot of our customers are telling us that they aren't seeing maybe some of the bigger players as often because they've gone up market. And so from a pricing perspective, we're sitting at quite an attractive place. But that doesn't mean there aren't smaller players that continue to move up. And so it's a competitive market. We've got a great solution to address it. But I think there's a good space where we're at, but continuing competition both downmarket and upmarket for us.

[Operator]

Next question comes from the line of Thanos Moschopoulos, from BMO Capital Markets.

[Thanos Moschopoulos, analyst]

The large uptick we saw in the payments penetration relative to last quarter, was that primarily driven by introduction of the gateway fee for customers not using Thinkific Commerce?

[Greg Smith, executive]

That's a big factor, yes, definitely.

[Thanos Moschopoulos, analyst]

Okay. And the introduction of that gateway fee, did that result in any incremental churn? Or was that not an issue?

[Greg Smith, executive]

Nonissue in terms of churn. I'm not going to say that -- we probably lost 1 or 2, but nothing significant or meaningful as a direct result of that. We've been really good at -- our team has been really good at working with customers, making allowances, giving some extensions and being quite flexible with them in putting this in place and bringing them on board at the right time. And so it's worked out quite well, where it's been great at getting people to take a phone call, have a conversation. But the nice thing is, as I shared with that statistic around transaction sizes being 31% larger, there's a lot of really positive reasons for people to switch. And when they do make the switch, it's quite a positive experience. So no, the easy answer is no, it hasn't driven a meaningful amount of churn there.

[Thanos Moschopoulos, analyst]

Great. Can you remind us what you've been doing on pricing? I mean, clearly, the ARPU has gone up as a function of a mix that's skewing more towards Plus. But just remind us whether on the pricing of your plans, whether you've made any changes in the past while, or whether that could be an opportunity that you'd consider?

[Greg Smith, executive]

Corinne, I'll let you speak to Plus. On Self Serve, we haven't made any recent pricing changes, but I think there is opportunity for us to take a close look at this in 2025. Not always so much as a direct price increase, but just looking closely at the pricing and packaging and making sure that's appropriate. And I think there's some opportunities for us there, specifically around ensuring that as our customers' businesses grow, that our returns grow alongside theirs and so there's more opportunity to align them better with theirs.



And then Corinne can speak on the Plus pricing side.

[Corinne Hua, executive]

Thanos, on the Plus side, over the last 12 months we have been doing a few things in pricing. Three things come to mind. One is making it as easy as possible for customers to upgrade from Self Serve. And so seeing a lot more opportunity with what we call Plus Light. And then making sure that we're helping customers launch when they're coming in from the Self Serve plan into a Plus plan, where there's features that need to be added to their sites and that type of thing. And so we want to make sure that's a very best experience.



The other thing that we've done that is a huge opportunity for us going forward is driving multiyear deals. And so that's something we leaned on heavily in the past and have started leaning on much more heavily as we move forward. And what's exciting about that is it is a big part of how we continue to increase our NRR. And so a focus for us.



Probably the last thing is really aligning the value the customer receives with the various pricing plans. A big reason customers choose a Plus plan and even choose us compared to our competitors is the level of service that they get at Thinkific. And so we are fanatical about customer service. And so making sure that we're aligning value with service is a key part of our Plus mandate. And so we've realigned our Plus plans to make sure we're addressing that directly.

[Operator]

Next question is from the line of Robert Young, from Canaccord Genuity.

[Robert Young, analyst]

On the call you noted that the headcount increase in Plus sales was complete, but it also seems as though the adds there have been successful, as they've already started to contribute. So I'm curious about the decision not to continue to add sales. Is that a temporary pause? Is that because you've hired some new people in the sales organization and the management layer? Or maybe just go into that. If the efficiency is strong, why not keep adding sales in Plus?

[Corinne Hua, executive]

It's a great question. So we do continue to add sales. And as we look into 2025, a lot of it is how do we make sure our team today ensures we will have a successful Q1 in front of us. However, we did have a significant increase, 6% increase, to our sales team. And we are making sure that we can properly enable them on the [indiscernible] to be able to sell deals properly and really do everything we can to make sure that cohort is successful, but also continue to be focused on what do we need to drive Q1 results.



We are focused on maintaining around a 30% growth rate in Plus. And so that means we've got to continue to bring in the right deals and continue to make sure our customers are successful. And so that will include driving our sales teams size up.

[Robert Young, analyst]

Okay. And the second question, in the disclosures it looks like paid adds, the paid customers, declined quarter-over-quarter for the second quarter. And I think you said that Self Serve ARR was flat. So I was hoping you could discuss those 2 dynamics.

[Greg Smith, executive]

Yes, I can clarify that. The actual change was 6 customers. So that should give you the answer there.

[Robert Young, analyst]

So it's rounding, in the rounding numbers.

[Greg Smith, executive]

Yes. 6 rounds to 100, yes.

[Robert Young, analyst]

So paid customers is essentially flat and Self Serve ARR is flat. That's basically...

[Greg Smith, executive]

Correct.

[Robert Young, analyst]

And then maybe last question, I'd be curious to see -- well, I'll do 2 questions in 1. One, it would be great to get an update on Spotify, if anything has moved there. And then if you could just sort of update us on your current strategy behind The Leap. You're growing users there, and I think there's might be some paid -- opportunity to pay on the website. And so I just -- maybe just go into those 2 pieces and give us an update, and then I'll pass the line.

[Greg Smith, executive]

For sure. On Spotify, continue to be really excited about the opportunity. We continue to make solid progress. They've been a great partner to work with and continue to be that. And we're starting to -- we're seeing more customers come to us, build on Thinkific and sell on Spotify. So all of that seems to be working well. Other than that, no big numerical update to share yet at this point, but we're hopeful to be still working towards something like that, and all signs are still quite positive in that relationship and how things are going there.



And then specifically on The Leap, I think what we're seeing there and where we're leaning in is just kind of a market capture opportunity, in that we're seeing those sign-ups come in quite fast and furious. We're testing a lot around AI and alternative product solutions there to get people up and running faster, and it's working quite well. We're able to move really quickly and iteratively there because it's sort of carved out product-wise from some of the other things we're doing.



So we're seeing it as a place where people can get started and find success quickly. We're also kind of surprised that the customer base there looks fairly similar to what we're finding in Self Serve as well. So a lot of similarity, but coming in through a different front door. And so it continues to be working quite well on that front. I think we're heading into a phase where there's an opportunity to turn it into something more.



On the paid front, although we did turn on some paid plans there, I wouldn't fixate on that. It's not the primary strategic focus of it, and we're pushing more for penetration as opposed to ramping up revenue and paid customers there, although there are a few at this point.

[Robert Young, analyst]

Okay. There was a note in the press release that there was an AI onboarding tool that had driven some success. I'm sort of curious, is that a sign of something that's migrating over from The Leap?

[Greg Smith, executive]

Certainly, taking the learnings. I mean, we've got -- we've definitely built out a service layer of AI in our core product that we can start to leverage across our core product. The Leap has done a lot with AI as well, but we're certainly doing more in Thinkific. And yes, some of that is sort of taking the learnings from what we've seen work on The Leap as well.

[Operator]

Your last question comes from the line of Todd Coupland, from CIBC.

[Thomas Ingham, analyst]

Just following on that Gen AI question, how much of the customer base is using Gen AI for content creation at this point?

[Greg Smith, executive]

I don't know the answer to that question precisely, but I will look into it and we can get back to you on that. It's [indiscernible] ...

[Thomas Ingham, analyst]

Is it, qualitatively, a small amount? Or is it a surprisingly large amount?

[Greg Smith, executive]

It depends a bit on where they're using it. I mean, as long as they're opting in, and we are letting customers know so that in the extreme examples where they don't want to leverage it, then there's an opportunity to opt out, the vast majority are using it in one shape or another. It just depends on how far you mean in terms of generating their actual content.



So I would say it's -- I wouldn't want to give percentages. But in terms of using Gen AI, generally, it's quite high.

[Thomas Ingham, analyst]

And does that -- like, if you look at that a year or 2 down the road, what does that evolve to? Thoughts on that?

[Greg Smith, executive]

I think using it -- and I don't want to fixate so much on the generation of content in the learning sense; like, for example, production of video or production of text or things like that, the actual content that the students consume. I think that's something that some people will use, others won't.



We can -- one thing we do there is we solve the blank page problem quite well. So you're getting started and you're trying to figure out how to draft something new.



I don't think that's ever going to be everyone. I think where everyone is going to be using it is in the derivative content. So you've already uploaded a video or added some content or provided some input to us, and then we create derivative works for you.



So a simple iteration of that would be when you put a video in, we can automatically produce quizzes based on the content in the video. So it's still very much your content, your words, but we're producing that derivative content.



And I think that plus a whole bunch of other uses of AI is something that's going to be pretty much ubiquitous across everyone on the platform just because there's going to be so many great ways to kind of accelerate what you're doing.

[Thomas Ingham, analyst]

And do you -- one last question on this. Do you feel what you've done so far with this, is it differentiated? Or are you seeing it across the peer set?

[Greg Smith, executive]

There are definitely ways we've differentiated. I think that -- and there are some that are table stakes. So the way I see AI is there -- probably the most important thing is that we're building to constantly leverage new models. One thing that we've been able to do is build in a way that as new models come out, whether it's one company or another, whoever the current leader is, and has the most innovative or powerful model, we can tap into that and sort of plug-and-play between the multiple different model options, because the winner today may not be the winner 6 months from now. So we're always able to leverage the latest innovation. And then we build on top of that and open it up in a way that all of our engineering teams can tap into our service layer there.



So I think that's been something that is somewhat differentiated in our space, and then that allows our teams to be more creative about how they're solving problems for specific areas of the product that they're building or a specific job they're trying to accomplish for our customers.

[Thomas Ingham, analyst]

Okay. And then I wanted to ask about Plus. So clearly, the new sales team is a driver of growth, and then stepping up the feature set of Thinkific Payments with ACH and invoicing. When would you expect that to start to hit, I guess, Plus close rates, if you will?

[Corinne Hua, executive]

We're quite excited to start going after that customer base with these new features. The ACH is available now, but probably not as attractive as invoicing, which is quite common with business customers, and that should be coming out in a matter of months. And so it's soon. I would expect that during the first half of 2025, we should be able to make some good progress there.



We don't have the gateway fee as a catalyst on the Plus side. And so I think we're going to have to look at other measures that help us properly attract customers, and features is really the key to making it as easy as possible for people to have all their reporting in one place.



And so we know what we need to do. The task is going to be going out and marketing it effectively and doing what we can. And maybe if we're not able to find the growth, but we know we have the right feature set, we know we look at do we add a fee in the future.

[Thomas Ingham, analyst]

And you called out you hope to maintain Plus at a 30% growth rate. Yet, you're there this quarter. So are you saying that these efforts are just going to allow you to hold the growth rate? Or is there the possibility to accelerate Plus growth? Just talk about your thinking on that.

[Corinne Hua, executive]

Lots of opportunity to accelerate it, but we're quite happy here. And I don't want to wrong-set expectations. We've got lots of opportunity. Commerce is a big lever for 2025. And so if we can maintain 30%, we'll be really happy. We'd love to beat it.

[Operator]

There are no further questions at this time. This concludes today's conference call. Thank you very much for your participation. You may now disconnect.