CA - Docebo Continues Growth Path But Sees Headwinds

Summary

• Docebo reported its Q3 2022 financial results on November 10, 2022.
• The firm provides learning management software to organizations of all sizes.
• DCBO has grown revenue and is now generating operating profits.
• However, its valuation multiples are high, so I'm on hold for the stock for valuation concerns.

A Quick Take On Docebo

Docebo ( DCBO ) reported its Q3 2022 financial results on November 10, 2022, beating revenue and EPS consensus estimates.

The company provides online learning capabilities with AI-enhanced functions to improve learning results.

DCBO has produced impressive revenue and operating income growth but has a high valuation.

I'm on Hold for DCBO due to valuation concerns.

Docebo Overview

Toronto, Canada-based Docebo was founded in 2005 to develop an integrated learning management system ((LMS)) for organizations of all sizes to provide internal and external training capabilities.

The firm is headed by Founder and Chief Executive Officer, Claudio Erba, who was previously project leader at MHP Srl and Product Manager at Selpress.

The company's primary offerings include:

• Learn LMS

• Impact Measurement

• Analytics

• Shape

• Content

• Flow

The firm acquires customers through its direct sales and marketing efforts, both through inbound and outside sales teams.

Docebo's average contract value was approximately $45,000 as of June 30, 2022.

Docebo's Market & Competition

According to a 2020 market research report by Global Market Insights, the global market for e-learning services is expected to reach $375 billion in value by the end of 2026.

This represents a forecast CAGR of 8.0% from 2020 to 2026.

The main drivers for this expected growth are continued technological innovation and growing Internet usage worldwide.

Also, the COVID-19 pandemic has acted as a forcing function for many users to pursue their education in an online environment, likely increasing the industry's growth prospects in the years ahead.

Below is a chart showing the expected growth in the market by technology:

Major competitive or other industry participants include:

• Absorb LMS

• SAP SuccessFactors Learning

• Saba Cloud

• Tovuti LMS

• Cornerstone Learning

• Captivate Prime

• 360Learning

• SumTotal Learning

Docebo's Recent Financial Performance

• Total revenue by quarter has grown according to the following chart:

• Gross profit margin by quarter has trended lower in recent quarters:

• Selling, G&A expenses as a percentage of total revenue by quarter have dropped more recently:

• Operating income by quarter has risen per the chart below:

• Earnings per share (Diluted) were strongly positive in Q3 2022:

(All data in the above charts is GAAP)

In the past 12 months, DCBO's stock price has fallen 30% vs. that of Instructure's ( INST ) rise of 18.6%, as the chart indicates below:

Valuation And Other Metrics For Docebo

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

As a reference, a relevant partial public comparable would be Instructure; shown below is a comparison of their primary valuation metrics:

(Source - Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

DCBO's most recent GAAP Rule of 40 calculation was 145.9% as of Q3 2022, so the firm has performed extremely well in this regard, per the table below:

(Source - Seeking Alpha)

Commentary On Docebo

In its last earnings call (Source - Seeking Alpha), covering Q3 2022's results, management highlighted its strong revenue growth despite 'an environment that is increasingly impacted by macroeconomic headwind.'

The firm seeks to 'double down' on its enterprise segment efforts, where leadership sees numerous opportunities.

Notably, management is seeing a 'near-term outlook (that) may become incrementally more challenging.'

As to its financial results, total revenue rose 42% year-over-year on a constant currency basis, while gross profit margin was 1 percentage point lower.

Management did not disclose an all-customer retention rate but said customers that use the firm's software for three or more use cases have a net dollar retention rate of 120%.

SG&A as a percentage of total revenue continued its downward trend, while operating income rose significantly, as did earnings per share.

For the balance sheet, the firm ended the quarter with $212.7 million in cash and equivalents and no debt.

Over the trailing twelve months, free cash used was negative $900,000, of which capital expenditures accounted for $1.0 million. The company paid $4.2 million in stock-based compensation in the last four quarters.

Management did not provide forward financial guidance but said the firm's focus will remain on a growth trajectory.

Regarding valuation, the market is valuing DCBO at an EV/Sales multiple of around 14x.

The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 6.2x on February 6, 2023, as the chart shows here:

So, by comparison, DCBO is currently valued by the market at a substantial premium to the broader Meritech Capital Index, at least as of February 6, 2023.

The primary risk to the company's outlook is an increasingly likely macroeconomic slowdown or recession, which may accelerate new customer discounting, produce slower sales cycles, and reduce its revenue growth trajectory.

Docebo has produced impressive revenue growth results, is now generating material operating income, and appears well-positioned for future growth.

However, I'm concerned about its high EV/Revenue and EV/EBITDA multiples, which are well above the market average for SaaS companies.

Accordingly, I'm on hold for DCBO for valuation reasons.

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