Cabot Small-Cap Confidential Issue: December 7, 2023

The Big Idea

You’re likely hearing about how we’re entering a new era of labor productivity.

It’s been a topic of discussion and one of the reasons the economy could hold it together while inflation falls.

We all know productivity means doing more with less. On Wall Street, that translates to companies generating more output (revenue) with fewer inputs (costs).

In other words, making more profits without hiring a ton of people.

Saying those words to a stock analyst is like giving honey to a bear. It creates all kinds of excitement.

One of the ways companies look to get more out of their workforce, not to mention the partners they work with, is by teaching new skills.

This is often a win-win. The organization does better, people position themselves to earn more money and they don’t get replaced by those scary robots and computer programs tapping them on the shoulder.

The thing is, teaching old dogs new tricks is easier said than done. It takes a concerted effort, both from the learner and the teacher, not to mention some sticktoitiveness.

Maybe most importantly, the learning tools ALSO need to learn. What was relevant two years ago, and in some cases two weeks ago, isn’t as relevant today. Capturing and turning institutional knowledge into new learning methods, content, etc. has to be a part of any cutting-edge learning platform.

This is where AI comes in.

Enter today’s company, which makes learning software, fueled by AI, that’s helping to fuel greater productivity in some of the biggest companies out there.

Consider the following true stories.

We’re all familiar with Samsung, the massive South Korean conglomerate.

Not that long ago the company wanted to give in-store salespeople across the Baltic countries a learning tool that would act like a social platform for them to keep in touch, tap into current product information and host learner-generated content. It had to work on mobile devices.

Ever heard of La-Z-Boy (LZB)?

You know you have. The company’s been around since 1926 so it’s seen a lot of what works and what doesn’t when it comes to keeping its teams on the same page. After dealing with outdated learning technology and partners that were going rogue and buying their own tools, they needed to centralize their learning initiatives on one platform.

Zoom (ZM)?

Yes, the video conferencing company. The company had workers spending hundreds of hours on customer support, trying to figure out what was what and not being able to find answers and answer questions.

Some version of this same story has played out across companies like Amazon Web Services (AWS), Thomson Reuters (TRI), OpenTable, GoTo, nCino (NCNO), Cloudbeds and so many more.

They all have one thing in common. They went with solutions from the company we’re buying shares in today.

While the company isn’t well known, it has a solid customer base. I believe it will pop onto more trading screens as it delivers solid reports in the quarters ahead, ultimately delivering considerable profits for investors.

The Company

Docebo (DCBO) is a little-known software company disrupting the Learning Management System (LMS) market, grabbing market share from the large, legacy providers while also expanding into new markets.

The company was founded in 2005, is based in Toronto, Canada, and has a market cap of $1.5 billion. The pitch for its platform is that it’s modern, easy to use, cloud-based, customizable and just more engaging.

Complete with AI-driven solutions, Docebo gives customers a learning platform where learning admin teams can centralize a wide variety of learning materials – for both internal (employees) and external (customers, partners, suppliers) workers – and deliver world-class learning experiences.

The company is particularly strong with external training situations, which are a bit trickier than internal cases. The company also has a solid reputation for providing a cohesive platform that functions as a single pane of glass for all of an organization’s learning initiatives.

Customers control their own training strategies and retain, leverage and build on institutional knowledge. Coursework is delivered efficiently, learning progress is tracked, and there are tools for reporting and analytics.

Big picture, Docebo is a play on the trend to make employees more productive and better equipped to do their jobs and take on new challenges that can move their organizations forward. Call it up-skilling, re-skilling, on-the-job training, continuing education, whatever.

Most of the big enterprises out there these days, and a lot of the smaller ones too, see continued learning as a strategic investment that helps them stay competitive, without expanding the employee base and getting too bloated.

That’s where Docebo comes in. And it’s why both Amazon (AMZN) and Alphabet (GOOG), among others, have chosen to work with the company.

About 65% of revenue comes from the U.S. Roughly 12% comes from Canada, with the balance coming from Europe and Asia.

The company is an occasional acquirer of talent and technology, has very little stock-based compensation (i.e., isn’t constantly diluting the shareholder base), is profitable with enviable margins and is growing revenue north of 20%. The stock is somewhat thinly traded due to a large institutional and insider shareholder base.

Products & Services

The Docebo Learning Platform currently has seven main solutions and a half-dozen add-on modules. Here are a few details on each.

Docebo Learn LMS: The main solution, Learn LMS is a cloud-based learning solution used by learning admin teams to deploy scalable and flexible personalized learning activities. These can range from formal to social learnings, be used internally, externally, or blended, and for individuals or groups.

Docebo Shape: An easy-to-use, minimal-training-required, AI-powered learning creation tool that helps users create content from both internal and external data sources, then share that content across their organization. Role play with an AI virtual agent is part of the solution.

Docebo Content: A content library with over 200,000 courses and programs. Learning admin teams can tap into Docebo Content to source some of the industry’s best off-the-shelf e-learning content. Docebo Content specialists are available to help direct content selection.

Docebo Learning Impact: A learning measurement tool that allows learning admin teams to use questionnaires, benchmarks and next-step action items to validate the use of training programs while also improving their impact.

Docebo Learn Data: An integration that allows learning admin teams to securely link their internal data warehouse (and other business intelligence tools) with the raw Docebo Learn LMS data and analytics so they can get a more comprehensive view into how their learning programs are driving business results.

Docebo Connect: A tool that allows organizations to connect Deocebo to any custom tech stack in order to make a variety of integrations faster and more effective.

Docebo Flow: A solution allowing organizations to inject learning directly into other software tools used by the organization to create contextual, in-product training experiences.

Additional Modules: In addition to these main solutions, Docebo also offers a variety of modules that can be added to address specific use cases. These modules include:

• Docebo for Salesforce
  
• Docebo Embed (OEM)
  
• Docebo Mobile App Publisher
  
• Docebo Extended Enterprise
  
• Docebo Discover, Coach & Share
  
• Docebo for Microsoft Teams
  

Growth Initiatives

AI Initiatives: The company has been working with AI for years. For example, the company’s Docebo Shape modules leverage AI and predictive content recommendations, along with gamification, so users can earn points and badges. This can drive higher engagement. In August, Docebo announced a partnership with Google whereby Docebo will leverage Google Cloud to commercialize solutions that “transform the delivery of personalized learning at scale.”

Move up Market to Enterprise – AMZN and GOOG: Not long ago, some thought Docebo couldn’t compete with the big boys. But it’s been working with Amazon since at least 2021 and in August 2023 management announced a large, seven-figure deal with a “Top 5 Tech Company” that we later learned is Google, who is also a partner on Gen AI projects (see above).

Focus on External Learning: The company is already a standout when it comes to training for customers, partners, etc., and this is an area where that reputation will likely be leveraged to drive additional growth.

Founder and CEO to Become Chief Innovation Officer: Effective March 1, 2024, Mr. Erba will return his focus to innovation and technology development (including AI) and step back from the day-to-day CEO responsibilities. Given that his vision helped the company disrupt the LMS market, it seems that having him totally focused on the next phase of innovation is a positive. His replacement, Mr. Artuffo, has been with Docebo for over a decade.

Strong Free Cash Flow, 11/22/23 Issuer Bid: Docebo throws off a good amount of FCF (excess cash above operating expenses that can be distributed however management sees fit), which means it has the flexibility to direct cash to sales and marketing, M&A, share buybacks, etc., as it sees fit. There is a track record of doing all three, the latest being an issuer bid (announced November 22) wherein Docebo has put out an offer to buy up to $100 million of its own stock at 55. The motivation is to beat a 2% Canadian tax on buybacks that starts in 2024. These purchases will reduce float and increase FCF, EPS, etc.

Expanding Go-to-Market Strategy: Docebo is doing all the things we want to see in order to get its product out there, including growing its product base (Microsoft Teams, Community Hub, Learning site and Shape 2.0 all announced in September 2023) and forming partnerships and alliances (Google, etc.) and working with more system integrators (Ernst & Young, Darwinbox, etc.).

FedRamp Certification: Management is working to achieve FedRamp certification in 2024, which will open the door to more federal and state-level opportunities.

The Business Model

The bulk of revenue comes from subscriptions (92%) with the remaining 8% coming from professional services. Fees are typically paid annually, and most subscription terms run for three years. Fees are based on modules selected and number of users. There is minimal seasonality, though Q4 can often be a little higher than Q1-Q3. Docebo is sold under its own brand, as well as a white-label solution for Human Capital Management (HCM) vendors. The company is not in the content generation business.

The Bottom Line

Over the last nine months (through September 30, 2023), Docebo has grown revenue by 27% to $104 million. Adjusted EPS improved from -$0.01 for the comparable nine months in 2022 to $0.38 in the first nine months of 2023.

In Q3 (reported November 9) revenue grew 25.8% to $46.5 million, beating by $500K. EPS of $0.15 jumped from just $0.03 in the year-ago quarter and beat by an impressive $0.07. Average contract value (ACV) was up 11% to $49,400, signaling continued progress to larger clients and more use cases. Free cash flow was $8.4 million (18% of total revenue), way ahead of expectations for -$6.4 million. Management said the small-business market remains challenged, but large (enterprise) looks good.

A few customer wins from the quarter include Enterprise Holdings (car rental), Milwaukee Tool, Bojangles (restaurant chain) and Amazon AWS expanded its relationship with Docebo.

Current consensus is that Q4 revenue should grow by 24.3% to $48.4 million, and EPS should be around $0.12. That implies roughly 26% revenue growth ($180 million) this year. Looking out to 2024, revenue is currently seen growing by 23% to $221 million while EPS is seen up 40% to $0.76.

Risk

Competition, Macro Pressures: EdTech, Talent Management and HCM are all crowded markets and there are some big fish out there. Docebo needs to keep innovating to stay ahead, especially when macro pressures persist.

Best-of-Breed Offering Somewhat Limited: This is both a plus and potential minus. Downside is it may limit Docebo’s attractiveness to customers should momentum build to go with larger Human Capital Management (HCM) software vendors that offer a variety of solutions, including Talent Management.

Profit Margin Expansion Trend: It’s been good, but should competition intensify, sales and marketing expenses could need to ramp and dent the margin growth.

Small Business Softness (SMB): Docebo does most of its work with larger customers, but the SMB market isn’t insignificant and could become more of a drag on growth if it doesn’t pick up some.

Unknown, Canada-Based Company: Another plus, or minus, depending on your perspective. If Docebo executes (as I expect), the story will get out there and pull more investors in. If it doesn’t, the stock could flounder.

Small Float, Intercap Ownership: Intercap Equity (PE firm) owns just over 40% of Docebo, and a few other institutions (Cat Rock, Hillsdale, Fidelity) have decent stakes as well, meaning only about 22% of the stock is held outside of institutions and insiders. The recently announced issuer bid will further reduce public float in the near term. While this all limits stock availability in the short term, over time, some of these players should complete offerings (non-dilutive) and increase the public float.

Competition

Publicly traded HCM, talent and ed-tech competitors include Paycom (PAYC), Paylocity (PCTY), Paycor (PYCR), Workday (WDAY), Coursera (COUR), Udemy (UDMY), Skillsoft (SKIL) and Instructure (INST).

The Stock

Trading Volume: 90-day average trading volume is just shy of 58,000 shares. We could have a minor influence on any given day.

Historical Price: IPO December 2, 2020, at 48. Strong start, faded, then rallied to north of 90 by October 2021. DCBO fell with the broad market and growth stocks, finally landing in the mid-20s in June 2022. A brief run to 40 in August was followed by selling and DCBO was back bouncing between 25 and 30 through October. Momentum picked up in November and a steady uptrend carried DCBO back to 40 by February 2023. Absent a quick trip to 30 in May the stock was mostly pinballing in the 35 to 40 range until August, when a fierce rally to 46 followed the Q2 earnings report. Another pullback (to 37) followed, then, after a little bouncing around, DCBO took off in November, ultimately trading just north of 50 between 11/14 and 11/20. Shares then sold off (again) in the last week of November, finding firmer ground in December to level out around their current price of 45. Overall, DCBO is showing a pattern of higher highs and higher lows since May, albeit with a decent amount of volatility. We’re trying to pick up shares on “the dip.”

Valuation: DCBO currently trades with an EV/2024 Revenue multiple of 7. If the bull case continues to play out, the stock should gravitate toward a premium valuation relative to peers (not a discount), which could mean a multiple of 8 – 10, or higher. Much will depend on peer valuations, investor risk appetite, etc. Bottom line, the stock could easily trade into the mid-50s soon, and much higher over time (with pullbacks of course).

Buy Range: Over the next couple of weeks expect to buy DCBO within the 40 to 50 range.

The Next Event: On March 1, 2024, Founder and CEO Claudio Erba transitions to Chief Innovation Officer and Alessio Artuffo (current President and COO) becomes Interim CEO.

The Q4 fiscal 2023 earnings report is expected around March 7, 2024.

Current Recommendations

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.

Glossary

Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.

Disclosure: Tyler Laundon owns shares in one or more of the stocks mentioned. He will only buy shares after he has shared his recommendation with Cabot Small-Cap Confidential members and will follow his rating guidelines.

The next Cabot Small-Cap Confidential issue is scheduled for

January 4, 2024.