Description

Docebo (DCBO) is a software company in the corporate learning management space (think CSOD). Founded in 2005, they provide a cloud based solution allowing their customers, mostly small to mid sized enterprises, to train internal and external workforces, partners ,and customers, on things such as career development, sales training, and compliance.

The stock IPOed in Canada in 2019 and in the US in 2020, trading north of 20x revenue during the heady days of 2021.  The stock is now ~67% off its high and trades at a reasonable 4.5-5.0x fwd revenue with ~30% organic growth, mild cash generation even after sbc, and $200m cash against no debt.  We think Docebo is a high-quality growth opportunity that is fully derisked at ~$30 per share.  The company has a runway to grow 25-35% for some time, and a clear ability to “turn the knob” on profitability should their organic growth slow down due to their best-in-class S&M efficiency.

Business summary

Docebo's cloud based platform allows companies to create, manage, deliver, and measure engagement in an easy to use platform, leveraging advanced AI tools to add features like the ability to translate entire learning modules into different languages with a click of a button. Customers include multi-national companies such as AWS, Reuters, BMW, and L'Oreal. AWS uses Docebo to scale access to AWS training and certification product offerings globally.

The industry can be broadly divided into two types of players  - HCM (human capital management) suites and Best-of-breeds. HCM suites are larger HR management platforms that also provide learnings as part of its comprehensive offerings. Examples would be industry giants such as SAP or Workday. These platforms often have a LMS component that can be “good enough” for simple use cases. Best-of-breed platforms like Docebo focus solely on learning solutions, and they’ve been particularly effective as training solutions have expanded to include external use cases like training partners and customers, and not just employees. A growing demand for collaboration and mobile access also has created opportunities for best-of-breed platforms like Docebo to not only survive, but thrive against larger competitors.

As more types of corporate training and learning migrates from in-person classroom training to on-demand online courses, demand for DCBO’s platform should continue to grow at a healthy rate. Docebo has been able to separate itself from the pack with its AI powered platform that is highly configurable to different kinds of verticals and use cases. They are currently considered the leader in the enterprise LMS space and have been growing 2x the industry rate in the past several years. 

Growth runway

Docebo competes with legacy CSOD in coporate LMS, but its differentiation and focus is platform flexibility across multiple internal and external use cases. Listen to their quarterly calls to hear more about the greenfield opportunity for using this type of LMS software with vendors, resellers and corporate partnerships. For example, AWS uses Docebo to provide learning materials to companies globally (https://www.docebo.com/company/newsroom/docebo-to-power-aws-training-and-certification-offerings/).

Docebo’s average contract value (ACV) of ~$44k is roughly ⅓  the price Cornerstone OnDemand, a LMS leader for large enterprises. This makes sense to us given CSOD's likely premium bundles, entrenched position, and accumulated know-how. Docebo is a lower hurdle sale that we understand is more about flexibly improving workflows. And selling a more affordable product is relatively easier during recessions.

At $138M ARR in quarter end in q2 2022, there seems to be plenty of runway to grow relative to the estimated LMS market TAM of $9.5B in 2019 which is expected to CAGR 21% until 2025 (implying ~$30B TAM by 2025). Or looking at it differently, its current total number of customers of 3,106 covers just a fraction of the ~86,000 small and medium sized enterprises in the US, with the Land & Expand growth model and growing emphasis on selling to larger enterprises providing uplift in ACV. Net dollar retention rate in 2021 was 113% (average contract value has 4xed since 2016). 

(source: company IR slides) 

In addition to greenfield opportunities, the company also continues to report winning contracts away from competitors, recently announcing Chipotle will implement Docebo to replace their existing LMS provider. They also reported displacing a legacy competitor to onboard a large publicly traded U.S. mortgage services company, which started out as an external solution to train customers, but eventually lead to the expansion of the relationship to support internal onboarding, compliance, and professional development use cases, showcasing Docebo’s land-and-grab strategy perfectly. We think all of these data points validate the value proposition and the product market fit of Docebo and how well it competes in the space. The competitive landscape is fierce and ever changing so it’s something we will need to monitor going forward.

The LMS market continues to see strong demand, and DCBO is reporting strong demand despite the macro uncertainty.They are not completely immune, but so far the secular growth drivers seem to be strong enough to keep the company growing through the current uncertain environment. Sales cycle could be extended a bit, but so far we are not seeing a dramatic slow down in demand. Management cites “no decrease in the pipeline in terms of growth.” 

Attractive SaaS Name

Docebo’s rapid growth has been achieved very efficiency due to partnerships with Ceridian and MHR.  This S&M efficiency is critical to long-term profitability and valuation, since software G&A margin is broadly a function maturity/ ownership, and R&D margin improves with industry maturity.  That leaves S&M efficiency as the key determinant between software companies that have stalled out at 10-15% growth while still burning cash, and kings like TTD and TEAM that will have mature margins more like MSFT and ADBE.  Yes, this is simplifying, but after reviewing the whole software sector, DCBO ranks among the best in S&M efficiency and Cash Rule of 40 (sbc is just 4% of revenue). 

Valuation

When you add in the 80% gross margins, >90% recurring revenue, 110+% net retention, ~30% top line growth, and a secularly growing TAM, we think the stock at 4.5-5.0x fwd revenue is an attractive opportunity today. Given the company’s competitive position, attractive end market, and S&M efficiency, we get to ride its 20-35% growth over the next 4 years while expecting multiple expansion to 6-7x revenue.

For those wrestling with a valuation on EV/ Revenue, think about mature margins from first principles.  Docebo is an 80% GM software business that’s grown ridiculously fast organically while basically FCF breakeven.  If the business slowed to 10-15% growth due to maturing end markets, how much could they scale each line item?

LTM, their S&M, R&D, and G&A margins were 42%, 19%, and 23%.  The later two would provide some leverage but not a ton.  In a few years, R&D and G&A should combine for 30-35% of revenue, which is 5-10% less efficient than CRM and other big boys.  The key issue is S&M.  With the worsening macro, we’ve seen lots of SaaS slow to 10-15% growth despite S&M at 40-50% of revenue.  80% GM - 35% G&A/R&D = 45%.  If a company has to spend all that remains to grow 10-15%, they’ll have a hard time justifying 5x revenue via FCF yield.

We think DCBO’s S&M efficiency suggests they could grow 10-15% while only spending 10-20% of sales on S&M… well down the road.  At a 25-35% range of mature FCF margins, today’s price of 4.5-5.0x revenue would be a FCF yield of 5.0-7.8%.  Technically, the yield would be a little higher due to negative working capital.

Just about all quality software trades under a market-like ~4% FCF yield, many of which are even below 2.5-3.0% fcf yields net of sbc (for ex, bberg shows CRM at 4.6% yield less 1.7% of sbc = 2.9% real fcf yield).  If Docebo continues to deliver close to the efficiency they have historically, this multiple is going to look really cheap.  On the midpoint of the numbers above, if DBCO scales into 6% FCF yield at 4.7x revenue, it could rerate to a ~4% FCF yield at 7.5x revenue. That feels optimistic in this environment, but its certainly reasonable on the numbers.

The bear case is that competitive dynamics or market saturation cause their sales team to hit a wall, making all this just fun with numbers.  We don’t have any way to prove that won’t happen.  Although, historical S&M efficiency still matters in that scenario because it speaks to FCF margin under the umbrella of a strategic owner.  For example, PRSM.LN grew like a weed with great efficiency, but it hit a wall due to a commoditized product and competition from PATH, PEGA, APPN etc, and it was still bought by SS&C for 5x revs bc they could slash the cost base and theoretically boost S&M efficiency with bundling & cross-selling.  Admittedly, SS&C may have overpaid.

DCBO has ~$210M in cash in the balances sheet, which is about ~20% of its mkt cap. 

The company also has high insider ownership, with Intercap Equity, who were early investors that invested $33M into Docebo who’s now worth ~$400M, while current CEO Claudio Erba owns ~4%. 

Catalyst