Docebo Inc
TSX:DCBO
Earnings Call Analysis
Q3-2023 Analysis
Docebo Inc
Docebo's third quarter showed robust health with subscription revenue climbing by 27% and overall revenue up by 26%, comfortably surpassing the higher end of forecasts. Net Annual Recurring Revenue (ARR) observed an increase of $10.1 million, considering currency fluctuations, a testament to the company's sound horizontal go-to-market strategy across the enterprise and government sectors. The strong performance is evidenced by an impressive adjusted EBITDA margin of 9.7% and an enviable free cash flow representing 18% of revenue.
On a macroeconomic scale, no marked changes were spotted over the year, with large deal closures continuing at their measured pace. The enterprise segment maintains a sturdy pipeline, whereas small and medium-sized business (SMB) clients display a prudent stance. This offers a glimpse into market segment behaviors, with larger entities still active and SMBs adopting a cautious approach amid the economic climate.
Docebo has injected innovation into its platform, with offerings like 'Docebo for Microsoft Teams' streamlining the learning experience within work processes. They've expanded their platform with 'Docebo Community Hub' and partnered with AWS to offer 'Docebo Learning Site'. The preview of 'Docebo Shape 2.0', set to premiere in 2024, anticipates transformative features like role-play and AI panel options, augmenting interactive learning experiences. These enhancements not only demonstrate a steadfast commitment to customer empowerment through technology but also highlight Docebo’s swift assimilation of acquisitions like PeerBoard.
In a landscape where competitors may be retreating, Docebo stands on solid ground with a stable balance sheet that fuels ongoing innovation and strategic growth. This allows them to remain steadfast in their capital allocation strategy, focused on both judicious mergers and acquisitions (M&A) and rewarding their shareholders. Despite external challenges, Docebo clings to its vision of innovative solutions and learning as a critical element, fostering quality growth in service to both customers and shareholders.
Docebo experienced an 11% rise in average contract value to $49,400, with new customer contracts averaging around $70,500, highlighting both the platform's effectiveness and its ability to meet complex user demands. Large deals continued to propel growth, capturing approximately 55% of the gross ARR in the third quarter. While net retention rates remained stable, sales and marketing efficiency gains were evidenced by reduced expenditure, which fell to 34.9% of total revenue. These KPIs reflect a deliberate effort to enhance go-to-market strategies and refine the organizational sales structure.
Docebo's enterprise segment enjoyed improved demand generation thanks to enhanced business development and account-based management. Operational enhancements, including updates to their CRM system Salesforce, have bolstered data accessibility and productivity, reinforcing customer-centric operations. Furthermore, Docebo's strengthening partnerships, particularly with large system integrators, amplify their capability to serve expansive enterprise and government contracts, reflecting a strategic pivot towards significant industry relationships.
A surge of enterprise engagement was marked by securing a landmark contract with a top-five U.S. based global technology entity, highlighting the applicability of Docebo's solutions to an extensive array of learning needs. Other significant deals were struck with companies across various sectors, such as Enterprise Holdings for onboarding and compliance training, Milwaukee Tool for a multi-faceted partnership, and Bojangles for franchisee and internal training, underscoring Docebo's appeal to a diverse clientele and its prowess within the quick-serve restaurant vertical.
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Good morning, everyone, and welcome to the Docebo 2023 Third Quarter Earnings Call. [Operator Instructions]
I would now like to turn the call over to Docebo Vice President of Investor Relations, Mike McCarthy. Please go ahead, Mike.
Thank you, operator. Before we begin, Docebo would like to remind listeners that certain information discussed today may be forward-looking in nature. Such forward-looking information refer to the company's current views with respect to future events. Any such information is subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those projected in the forward-looking statements. For more information on the risks, uncertainties and assumptions relating to forward-looking statements, please refer to Docebo's public filings, which are available on SEDAR+ and EDGAR.
During the call, we will reference certain non-IFRS financial measures. Although we believe these measures provide useful supplemental information about our financial performance, they are not recognized measures and do not have standardized meanings under IFRS. Please see our MD&A for additional information regarding our non-IFRS financial measures, including reconciliations to the nearest IFRS measures. Please note that unless otherwise stated, all references to any financial figures are in U.S. dollars.
Now I'd like to turn the call over to Docebo's CEO, Claudio Erba. Claudio?
Hello, everybody, and thank you for joining us for our third quarter earnings call. With me today are Alessio Artuffo, our President and COO; and Sukaran Mehta, our CFO.
I will begin our call this morning with a short summary of our Q3 results and business update. We are pleased to report that subscription revenue increased by 27% and total revenues grew by 26% in September quarter with the total revenues exceeding the upper end of our guidance range. Net ARR added during the quarter was $10.1 million after adjusting for the impact of foreign exchange. ARR growth was solid, reflecting our strengthening horizontal go-to-market motion across the enterprise segment as well as the government vertical. Docebo continued to demonstrate a profitable, high-growth business with adjusted EBITDA exceeding our guidance. We delivered an adjusted EBITDA margin of 9.7% as well as a solid free cash flow of 18% of revenue during the quarter.
In general, global macroeconomic trends have remained consistent through the year with larger, more complex deals still taking time to finalize. But we did not see any noticeable deterioration and our pipeline in the enterprise segment remains strong. SMB customers continue to be cautious. Geographically, the U.S. was a more active market compared to Europe, which was seasonably lower during Q3.
After 3 years in a totally virtual format, we hosted a record number of participants at our annual customer conference, Docebo Inspire, in Nashville. It was exciting to see this community of current and potential new customers bring with them their interest for learning and their interest in Docebo platform. During this year's event, we announced 4 new platform updates that included Docebo for Microsoft Teams, Docebo Community Hub, Docebo Learning Site, and the preview of the Docebo Shape 2.0.
Docebo for Microsoft Teams enables learning in the flow of work. It tends to streamline learning, communication and collaboration by eliminating the need for separate platforms while saving time and ensuring a productive experience for the learner. Customizable dashboards with Teams can be personalized for different internal and external use cases, driving higher adoption.
Docebo Community Hub is an expansion of our platform designed to allow customers to create community of knowledgeable champions and [indiscernible]. Its purpose is to facilitate knowledge sharing, enhance collaboration and engagement, and empower our customers to expand their internal and external learning programs through connections. This update was led by the PeerBoard team, which we had acquired in the first half of 2023. It showcases our efficient M&A strategy illustrating Docebo's quick integration and utilization of newly acquired technology and engineers.
As our platform expands in depth and breadth, we are collecting an increasing amount of data about learners and the outcome of our customer training programs. With the launch of Docebo Learning Site, powered in partnership with QuickSight from Amazon Web Services, we are helping our customers utilize this data efficiently within their learn elements.
By simplifying the creation of custom dashboards and providing relevant reports, we are empowering our customers to track the impact of their training programs more effectively. Finally, as some of you have seen at Docebo Inspire, Docebo Shape will fundamentally change how training material is created and consumed. We announced a number of features that we will start rolling out in 2024. Two features that I am particularly excited about are role-play and AI panel features. Shape users can create a role-play scenario with an AI vehicle agent. This allows learners to practice specific conversation skills. Initially, we have focused on the sales enablement to scale, creating a role-play AI brain that helps the sales practice their sales pitch, but we see multiple use case applications that we will incorporate in our product roadmap. Moreover, with Shape AI panel, customers have full control over how their proprietary data is used and shared among their learners.
Now to capital allocation. Our balance sheet strength and financial profile enables Docebo to invest in innovation and gain broader ground while competitors are consolidating and cutting costs. Our capital allocation strategy remains unchanged and is focused on 2 areas, selective M&A and the efficient return of capital to our shareholders.
In conclusion, despite facing macroeconomic and global political challenges, our priority is to provide innovative and efficient solutions for our customers. Our customers view both external and internal learning as crucial in this environment. We continue to strive to deliver cutting-edge innovation to our customers with the goal of providing quality, profitable growth for our shareholders. Now I would like to turn the call to over Alessio, who will give you an operational update.
Thank you, Claudio, and good morning, everyone. Let me first go over some of our key KPIs this quarter. Company-wide average contract value increased 11% to $49,400 from around $44,600 in quarter 3 of last year. ACV for new customers in the quarter was about $70,500 compared to $61,000 in the June period. Enterprise customers with deal values over $100,000 in ARR accounting for approximately 55% of gross ARR generated in the third quarter. 41% of these new customers have chosen Docebo for 3 or more use cases. Again, highlighting the real impact of our platform as well as our ability to meet the complex needs of our customers.
External and hybrid use cases make up more than half of our pipeline. Expanding our reach into these enterprise customers is also enabled by our growing partnerships with large system integrators, who were a strategic part of both enterprise and government contract wins during quarter 3.
From a customer retention perspective, growth and net retention KPIs held relatively flat from quarter 2. In terms of customer acquisition costs, CAC, and sales efficiency, we achieved a significant improvement in our quarter 3 results. Sales and marketing accounted for 34.9% of total revenue, a decrease from 37.8% in the previous quarter. These improvements are a result of specific actions taken earlier this year, which focused on enhancing the effectiveness of our enterprise go-to-market strategy and optimizing the design of our global sales organization.
These actions include, number one, significant improvements in our demand generation results in the Enterprise segment through business development and account-based management, ABM. However, there is still plenty of room for further improvement in other areas. Secondly, we're benefiting from the successful implementation of our data and overall go-to-market systems, including but not limited to our updated CRM, Salesforce. These systems were introduced at the start of the year and enable our team to access actionable data faster, increasing productivity and reinforcing customer-centric organization.
Finally, we're strengthening our relationship with system integrators, strategic technology companies, and OEMs. These partners significantly broaden our reach to the largest and most demanding enterprise worldwide across various use cases.
Now I would like to highlight this with a few new customer wins, upsells and cross-sells. The most significant win of the quarter was a substantial deal we finalized and reported to you in August. Together with the large system integrators, we secured the contract of a top 5 U.S. based global technology leader. This deal allows us to support the diverse use case needs, including providing training for a vast external audience.
Other notable large enterprise wins included Enterprise Holdings, a leading provider of mobility solutions including car rental, fleet management, car sharing, van pooling, truck rental, luxury rental, retail car sales, and vehicle subscription as well as travel management and other transportation technology services and solutions. Enterprise has selected Docebo for their onboarding, compliance, and professional development learning requirements.
Founded in 1924, Milwaukee Tool, a global leader in providing innovative solutions to professional construction trades to improve productivity and safety, decided to partner with Docebo for multiple use cases.
Leveraging our leadership in the quick-serve restaurant vertical, we signed Bojangles, a North Carolina-born restaurant chain known for its scratch-made Southern food served at approximately 800 locations. They selected Docebo for franchisee and internal use case training.
And in Europe, we signed Sisal, one of the leading international operators in the regulated gaming sector. Active in Italy, Morocco, and Turkey, they have an offering that includes lotteries, betting, online game, and amusement machines. They selected the Docebo Learning platform to address the external use cases of retail and franchisee learning and for a number of internal use cases.
During the quarter, we had several significant upsells. One notable customer is AWS, where we expanded our relationship as they increase their use of our products and services. Additionally, we cross-sold into AWS engineering, marking a new department win for Docebo.
As we called out during our investor session at Inspire, we expanded our 4 pillars of growth to 5 when we started to focus on the public sector and began the process to achieve the FedRAMP certification. As a reminder, those 4 pillars include external use case and the continued greenfield opportunity where Docebo is the leader. Expanding our presence in large enterprise customers as demonstrated by the wins I outlined in the quarter. Upselling and cross-selling into our installed base, land and expand. And finally, expanding our partnership with OEMs and system integrators.
On FedRAMP certification, the project is on track. As indicated before, we expect this to be completed in 2024, which will enable us to participate in more federal and state level opportunities where this is a requirement.
From a government business development standpoint, our work with a big 4 system integrator and our preferred distributor, Carahsoft, continues to help us build a very healthy funnel ahead of achieving FedRAMP certification across both Fed and SLED. We have closed or expanded deals in several different U.S. states during the quarter. One such deal was with the U.S. Department of Energy for one of 17 national research labs that they manage with more than 5,700 researchers and support staff focused on innovations in nuclear research, renewable energy systems and security solutions. This national lab is using Docebo for external and internal use cases.
Now to OEMs. We were extremely pleased with the contribution from our OEM partners Ceridian and MHR during the quarter. With the signing of Darwinbox last quarter, our OEM alliances represent another strategic channel into both the enterprise segment and new geographies, representing yet another way for us to leverage multiple growth pillars simultaneously.
We also signed a global OEM alliance with a big 4 system integrator in quarter 2, Ernst & Young, EY. They are white labeling Docebo as the underlying technology used to address their customers and workforces upskilling and reskilling requirements.
In conclusion, while navigating the challenging macroeconomic landscape, our commitment remains on being focused on driving growth, but doing so with efficient execution. Creating value for our customers, diligent performance management and overall optimization of every single operational area in our control. In short, by applying discipline in our execution and focusing on customer needs, we're confident in our ability to continue to drive sustainable long-term growth.
With that, I would like to hand the call over to Sukaran.
Thank you, Alessio, and good morning, everyone. For those interested, a detailed breakdown of our financial results for the 3 and 9 months ended September 30, 2023 can be found in our press release, MD&A and financial statements, which are now available on our website and are also filed on SEDAR and EDGAR.
Total revenue for the third quarter grew to $46.5 million, an increase of 26% from the prior year and exceeded our guided range. Subscription revenues were $43.6 million, representing 94% of total revenue for the quarter and an increase of 27% from the prior year. Annual recurring revenue added during the quarter was $10.1 million after adjusting for the negative impact of $1.2 million, given the strengthening of the U.S. dollar relative to foreign currencies.
ARR at the close of Q3 was $181.8 million, an increase of 26%. We added 88 net new customers in Q3 and ended the quarter with a total of 3,679 customers, an increase of 13% year-over-year. Average contract value was approximately $49,000 for the third quarter, an increase from $48,000 in the second quarter of 2023 and an increase of 11% year-over-year.
The growth in average contract value is being driven by our continued expansion into the enterprise customer segment with ACV of $100,000 and above. Gross profit margin for the third quarter improved by 40 basis points year-over-year to 81.1% of revenue and was relatively consistent with the prior quarter.
Total operating expenses for the third quarter increased to $34.6 million from $20.8 million in the prior year period. During the third quarter, we recorded $1.6 million in onetime costs, mainly related to the acquisition-related earn-outs that are excluded from our adjusted EBITDA calculation. Our restructuring activities were completed during the quarter.
G&A as a percentage of revenue decreased to 17.9% for the third quarter compared to 21.4% for the second quarter of 2023. Adjusted for the transaction-related expenses, G&A represented 17.2% of revenue. Sales and marketing expense as a percentage of revenue was 34.9% for the third quarter compared to 37.8% for the second quarter.
Given our investments made in IT systems, restructuring activities and reduced seller attrition, we have seen an increase in productivity per headcount, resulting in improved CAC and sales and marketing as a percentage of revenue. That being said, we will continue to incrementally invest in areas to drive growth, such as the enterprise and government vertical.
R&D investments in the third quarter were $10.3 million or 22.1% of revenue, an increase of $8.8 million for the second quarter. R&D expense included $1.3 million of the previously mentioned onetime costs, and excluding these costs, R&D represented 19.4% of total revenue. Adjusted EBITDA performance of $4.5 million for the third quarter of 2023 or 9.7% of revenue was above our guided range of 7.5% to 8% of revenue.
We reported net income of $4 million for the third quarter of 2023 compared to $10.3 million for the third quarter of 2022. Adjusted net income for the third quarter was $5 million compared to $1.5 million for the third quarter of 2022. We generated free cash flow of $8.4 million or 18% of revenue compared to 16.2% for the second quarter of 2023 and 1.7% for the third quarter of 2022. We also earned $2 million in interest income in Q3.
In addition, as part of our NCIB program, at the end of the third quarter we had repurchased a total of 1,333,361 common shares for cancellation at an average price of $38.43 for a total cash consideration of $51.2 million. Share-based compensation accounted for a modest 4% of third quarter revenue compared to 2.7% in the third quarter of 2022. For the trailing 12 months, the post dilution impact was less than 1%.
Now for our Q4 2023 outlook where our guidance is above the Street's consensus for both the top and the bottom line. Here are the key takeaways. We expect total revenues to range between $48.3 million and $48.5 million. We expect gross margin to range between 80.5% and 81.5%. We expect adjusted EBITDA margin to range between 10% and 10.5%.
A few points in addition to note regarding the fourth quarter guidance. We expect subscription revenue to be about 2 percent points higher than overall company revenue, while professional services revenue to decrease sequentially from Q3. This is being driven by our increasing work with system integrators who are a critical part of both of our expansion into the large enterprise accounts as well as the Fed and SLED space.
In conclusion, I would like to highlight these 3 key points. One, our market-leading position and stabilization in the enterprise space drove improved unit economics across our business during the quarter. This is further evidenced by the fact that the number of customers who generated greater than $100,000 in ARR increased 55% year-over-year.
Two, we are generating meaningful free cash flow. Using this metric combined with subscription revenue growth, we have exceeded the rule of 40 for the past 2 quarters. Our cash allocation strategy remains focused on strategically investing into our 5 pillars of growth, tuck-in acquisitions that align with our innovative product strategy, and returning excess cash to shareholders through our NCIB program.
Finally, we now have a clear path to exceed the profitability guidance we provided earlier this year as we now expect to exit the year with adjusted EBITDA between 10% to 10.5%, while continuing to maintain incremental investments in innovation, FedRAMP certification, and our go-to-market motion in the government and the enterprise sector. That concludes my prepared remarks.
Operator, please open the line so that we can take some questions from the analysts.
[Operator Instructions] Your first question comes from Suthan Sukumar from Stifel.
Congrats on the very strong results this morning. Pretty impressive to see the net new ARR adds come in quite strong along with a nice uptick in your ACV. I had a question as far as just broader overall go-to-market. It's good to hear that your direct sales motion is having more impact. But it also sounds like there's a growing role that your SI partners are playing here. How are they sort of helping you evolve your overall go-to-market strategy in the enterprise? And as you work with these partners, are they helping to provide you guys with more visibility into next year just given where enterprise spending trends are going? Just any thoughts there.
Suthan, thank you for the question, and I appreciate the nice words. Partnering with SIs has always been a goal of ours. This required some overarching maturity product and services-wise, because in order to be a compelling partner for an SI, you have to have a certain size of a company, certain target customers, and a product that suits itself to delivering high value for these companies that are looking to maximize on their services revenue and consulting capabilities.
With that said, there is no doubt that working with these companies gives us a longer-term view on our enterprise opportunities when we work with them on deals. I believe we're quite early in our journey in working with SIs. There's a lot more work that needs and will be done. That needs to be done and will be done.
I would say, in the area of SIs, one of the latest evidences of early success is what we are also accomplishing not only in the commercial segment, but also in the government segment, where we have gotten extremely close with a top 4 SI consulting firm that is giving us the ability to really accelerate our entry in both the SLED and Fed market. Overall, I would say our view of the SI market is an area of investment that is already returning results, but that we believe has great, great, great return for the future.
My next question is really on the opportunity that you guys have ahead of you in the public sector. You guys announced the U.S. Department of Energy win this quarter. And you guys are still sort of in that it sounds like you're still on track from a FedRAMP certification process. Can you provide an update here in terms of what you're able to do today from a go to market, from a go-to-market motion perspective in the U.S. government? It sounds like you are able to win deals today both on the federal and state side, without FedRAMP in hand. Can you talk a little bit about some of that progress there and really what changes once you do have FedRAMP?
Well, as we stated in the past, for us, winning in the SLED portion of the government market is not completely new. We already had a relatively healthy portion of our customer base in that segment. What's exciting to us is that we accomplished that percentage with minimum to no deep focus in that. And so like whenever you focus, you usually improve an operating machine. And that's what we did by standing up the government capability. On the SLED side specifically, the opportunity is enormous. It's time-accelerated because not all SLED organizations require a FedRAMP-like or a state ramp-like certification.
Some do, and we will reap the benefits of FedRAMP in the case also on the state side. We are not only deep in deals in SLED, thanks to the partner that I mentioned before, but in general we brought onboard individuals like our VP in government that have a deep knowledge of the space and know how to execute on teaming agreements that are essential for the execution in more complex even state deals. What we've been at work on deeply is really developing.
On one hand, our overall marketing capabilities, messaging, we've learned a lot about what state-like organizations need. And we have further conversations with many partners and distributors like Carahsoft that are making this is preparedness for large scale I would say. And I believe we're on the right track. And when FedRAMP completes, we will be even more in a better position.
Congrats again on the quarter.
Your next question comes from Josh Baer from Morgan Stanley.
I wanted to ask about the expansion that you talked about in your prepared remarks with Amazon. Just wondering if that was new in the quarter, if you could talk a little bit more about the use case and the timing and the impact of that expansion.
Sure. Thank you for the question. Amazon is a flagship customer for us. We started with Amazon AWS and we've added on several areas of the business within Amazon. And the latest Amazon SMB is another example of that. Overall, I would say the biggest project in terms of size and scope remains our Amazon AWS initiative. But this latest Amazon SMB project, which is relatively smaller in size, it's just one of a few that we have targeted within the Amazon Corporation. Our job is to continue penetrating this account. And in order to do that, our focus is on making AWS very happy, and we are strategically focused on it.
I just wanted to add quickly on that, just from an AWS perspective, it was we of course have the major installation, which is Skills Builder, where we put this model win on the engineering side, which is the department that we won within AWS. But we also expanded within the current contract that we have on the AWS Skills Builder, which is a customer academy. We continue to build and expand within the current contract and other departments, so there's several ways to expand.
Excellent. I wanted to ask one more on competition and thinking about it from the lens that Gen AI continues to evolve and impact the world. The need for skilling and reskilling is increasing, and so I'm wondering if you're seeing any changes from the broader HCM suite players, if they're more focused on their learning modules. And generally, if those larger HCM suites are putting more attention to the learning segment of the market?
Yes, Claudio speaking. First of all, we are capitalizing on mistakes that some competitor is doing. Mainly, the early LMS players and not HCM. The dynamic we see in the HCM space is typically year 1, their LMS component is focused on various training topics like soft skills, compliance and language training. But the customers start having sophisticated needs in terms of scalability, multiuser provisioning, multi audience, and you name it, all the really sophisticated needs that the only vertical LMS player playing in this horizontal in the market can provide. The HCM small LMS models are not satisfying this need which our enterprise needs. Sometimes, we do see that customers adopt these small components let's say yes, and then they realize that, okay, it's free or almost free, but it doesn't provide complex premium need.
And Josh, just to also add to that, just some reference ability, is that if you look at a couple of wins specifically that whether it's Milwaukee Tool and secondly I would say Enterprise, these are folks exactly doing what Claudio spoke about. They hit a moment at which they need to move to a platform that can serve their needs from a learning perspective from legacy HCM platforms.
Your next question comes from Kevin Kumar from Goldman Sachs.
I wanted to ask about the enterprise, how are sales cycles kind of trending and shape of the pipeline? Any color there would be helpful. And as it pertains to that, if you can talk a little bit about the recent big 5 U.S.-based technology company that you won, I guess kind of the main use cases there and the process of winning that deal and anything on the relative size of the deal would be helpful.
It's Alessio. Thank you for the question. Look, Kevin, I'll start from the latter part of the question on the strategic deal that you referenced. Whilst we are unable to share the exact logo name, we are extremely proud of serving one of the worldwide leaders in their respective tech space in which they play into. I would say a few things with this prospect in particular that key highlights would be we've been navigating a deep degree of complexity that is an organizational complexity of the customer.
A deep degree of complexity due to the various needs that were being addressed in terms of use case. You were asking which ones, and the primary targets were sales mastery, sales enablement, and customer training, so the perfect equation of hybrid positioning that we have in the market. And I would say the third degree of complexity, but also leverage, was whilst we were working with this organization also developing the relative relationship with the system integrator that had a strong in the company in order to win fundamentally their selection because the SI was also utilized for a selection opinion during the RFP/RFI phase.
All that to say, we were proud to beat the best-in-class largest companies in the LMS space and to substitute and displace technologies in learning that had been serving this company for many years. That's I think as much as I can say without entering into specifics that would otherwise kind of be beyond our NDA. With the more general enterprise posture, we're so excited. We believe that we are positioned in a really ideal way to continue to win the best companies in the world because of this ability to adapt to multiple use cases. See reference ability is a really huge thing and advocacy in enterprise.
And so being able to demonstrate and speak to deployments like the ones we just discussed, it goes well beyond any demos or any product conversations. Our product, notwithstanding that, has matured as our operation globally has matured. Overall, the company posture is just in an ideal space to continue to win share of wallet in the enterprise space. And our demand is reflecting that because our business development team is crushing results on our enterprise segment. If I'm extremely excited and we continue we will continue to deliver results.
Yes, Alessio. From another angle, from the product angle, our roadmap is also focused on supporting very sophisticated enterprise needs from several point of views. Precursor, security, and scalability. Anecdotally, I'd seen a customer, a very large enterprise customer, a couple of weeks ago, late on migrating to the new database architecture that Fabio and the team have built. They were late for their own reasons. And when we deployed the new solution, we had seen the scalability going skyrocketing. I mean the technology we have is super scalable and rates were very, very for a very large amount of users, millions and millions and millions.
That's great. I appreciate the color there. And then I wanted to ask about I think last quarter there was a comment on SMB churn kind of impacting kind of the new customer adds. And so curious if that's persisting and if it's impacting any of the other metrics like ARR growth or retention?
Yes. Kevin, I'll take that one. I think just to kind of remind, so when you think about SMB in our world, just from a perspective overall, almost 50% of what we do in the quarter is in the large enterprise segment. That's contracts of $100,000 and above. And SMB will be sub-20% of what we've done in the past. The way we've spoken about it in the past as well as consistent is that SMB is a customer that's primarily driven through inbound. It is a first-time adopter, requires a lot of touch. From a unit economics perspective they are certainly I would say not as optimal as the mid-market or high enterprise customers are.
And what you will see from us is that we will continue to play in that space to the extent that the unit economics makes sense as well as we watch for innovation in that space because that's really where the next Docebos come from, and we really want to understand if there are certain areas where we can we watch for from a competitive landscape. But otherwise, the first-time customer, we will continue to focus from an inbound point of view, but primarily, the higher investments that are paying off, as you can see in the cycle of earnings in the past quarter, is focusing on mid-market, on enterprise, moving upmarket because that's where the gross retention, net retention, the ability for us to be in multiple use cases.
If you look at the statistics that I spoke to, 80% of our customers are in 3 or more departments, or 2 or more departments, at 50% in 3 or more departments. And that really gives you the stickiness and gross retention is held relatively flat to the prior quarter as I spoke, and that's a reflection of us moving upmarket.
Your next question comes from Martin Toner from ATB Capital Markets.
You have typically given NRR with Q4 print. And can you give us a bit of a sneak preview there?
Martin, I love the question, but as you know, we provide that at the end of the year annually. We will provide that number when we report Q4. But if you from a perspective of gross retention holding flat, I can the only thing I can add that may help you is that we had a very strong, one of the best quarters we had, in upsell/cross-sell motion during the year.
Great. Thank you very much. When I look at your guidance going into the big Q4, it looks a little looks kind of conservative first glance. Just wondering if you can just give us some color on how Q4 is shaping up, how incremental ARR might look relative to some of the previous year's Q4s.
Yes. No, listen, Martin, from our point of view, listen, when you think about ARR and subscription revenue it's relatively straightforward. You take the ARR at the start of the quarter and it gives you a sense of what the subscription revenue at a minimum would be. And really, to the extent that we close a number of the deals that will be in Q4 that come in earlier in the quarter, that can have some impact into adding some subscription revenue during the quarter.
But we of course always try to make sure that when we guide from a revenue perspective, it gives we feel confident about it and have the ability to do as best as we can to exceed it. From a profitability point of view, I will say that I think we demonstrated I think, if you've seen the numbers relative to consensus, we were 170 basis points ahead. I had spoken to the Street that I would be at 10% exiting Q4, but we are pretty much at 10% at this point.
We will probably make some investments as we think about some FedRAMP investments that we talked about in Q4. That will be more Q4 specific items and some things in R&D, but we feel pretty confident about the number I put out there in the consensus for EBITDA. We'll see if we can do better than that, but we feel very comfortable where we are in terms of the number we provided, both for revenue, gross margin, and EBITDA.
That's great. Last one for me. Has there been any change to the timing for FedRAMP approval that you communicated at the customer conference?
Alessio, do you want to take that? I can kind of give insight.
I'm sorry, could you repeat that real quick for me?
Yes, just wondering, has there been any change compared to what you communicated at the customer conference?
No changes.
Perfect.
Martin, in terms of that, just to make sure we understand, is that on the FedRAMP side, we are we've spoken about 2024, but there's obviously factors that can either accelerate or not in 2024 because one of the important aspects to remember, I just want to call it out for the Street not to get too ahead, is that we there is a program where you to the extent you get a sponsor, there's a possibility that can accelerate. But if there is no sponsor, then it takes a quarter or 2 longer. But generally, 2024 is the year where we should we've indicated we will get there. And as we to the extent we get any news on sponsors, we will share that with the investor base.
Your next question comes from Robert Young from Canaccord Genuity.
You've already talked a lot about your success with large enterprise across multiple use cases. I wanted to dig into a flavor of that. It appears with enterprise in Milwaukee here in the quarter that the entry point here is changing a bit. I think you said 50% of the pipe is external. But in the past, the external has always been your entry point in enterprise as I understand it. It now looks as though you're very much broadening that out. I'm just curious, what's driving that? Is that just the outbound effort? Or is it the way that the market is looking at you? Or is it partners that are pulling you into these sort of internal non-external large enterprise opportunities?
Claudio speaking. What's happening is that there is a shift in the industry on OEs that are recognized as leader and the best of breed. Now if you want to have the best LMS in the market, in the world by the way, and you want you have to choose Docebo. That's it. For sure, the partnership with SIs helped us to be endorsed like this. But usually, when a customer writes an RFP, and you are right, not for a single department where we start and then we upsell and we cross-sell to other departments, it's common now that Docebo is also the choice for the global projects. Global projects can be looked at in a couple of ways.
Whether there is a single decision maker that wants to deploy a global LMS or, and as happened a few weeks ago with the big technological win, a federated group of people that goes together, puts the project together to have a single LMS with different experiences, learner experiences based on the department that logs in inside the Docebo infrastructure. I don't know if Alessio wants to provide more flavor on that?
Yes, I would just add one thing. In the macro environment, the other shift in addition to the one that Claudio was mentioning, is the role of CFOs and CIOs has increased in these strategic decisions. And the impact of that trend is that we're sitting more often with individuals that come from a perspective that is not necessarily the internal perspective or the external perspective, but it's making the best decision for the corporation in order to get the best technology that has the best path forward towards being really a sheer technology among the group.
We're sitting often with CIOs that say, hey, I have a point solution on the internal side, and there's a vision of doing customer academy in 2 years. I need a product that does both really well. And oftentimes, that is even CFO pushed. From a business development standpoint, the impact of that is we are testing personas so to speak or buyer personas that in the past were less perhaps relevant for us. But we're working those a lot and we're seeing great results.
Okay. And maybe just a collar to that would be around if the entry point is the CFO or the C-suite, I mean obviously that's success on the retooling of your sales go-to-market. But I'm also curious of where the opportunity is an HRIS system or a broader HR tool and learning is one element of it, how does Docebo deal with that? Or is that something that you would walk away and focus on best-of-breed application of training and learning?
I think Claudio, go ahead. I was going to say I think Claudio represented it really well before, but I'll let you go ahead and cover kind of the topic.
Actually, the way we deal with HM systems is in 2 ways. Our OEMs, post players and usually are also local players that cannot build their own LMS in the current areas of the world are integrating Docebo. The other part is with Docebo Connect. I mean we have this big marketplace of sessions that connect with all the HCMs out there or with the HR ecosystem. Because HR ecosystem is not only HCM.
There is talent, there are many other angles that you need to integrate in organically inside the organization. What is powerful about Connected that's clear is that we do not provide static integration. Strategic integration is, this is integration, go and use it. But in standard integration, we can change it for you based on your needs. Different workflows, different rules based on the customer needs. We approach the HCM software ecosystem from 2 angles, RM or integrate.
Your next question comes from Richard Tse from National Bank Financial.
It was pretty clear from your conference that you've got an incredible amount of momentum and it's still very early days. But what I'm trying to understand is that if you can give us a sense of your market share today, really trying to assess the runway here in front of you. And as you add sort of more markets, I'm trying to get a grasp on what that share would be.
Yes, Richard, I'll speak to some numbers I think we printed and we'll be happy to kind of recircle it a few quarters ago. Just to give you some perspective, and we did some work in the U.S. market and then just globally, but I'll even just speak to the U.S. market, which is in the top of my head what the numbers are. If you think about the external versus internal use cases, we've always spoken about that 50% of my pipe will lead from an external use case where the win rates are the highest. And as Fabio spoke about and last year in terms of internal use cases, we're seeing a lot of opportunities come to our desk because CIOs are thinking about long-term multiple problems, not just one problem. And so some numbers.
If you think about the U.S. market next 5 years, $8.5 billion up for grabs, almost 70% of that is greenfield in the external use case. And then 1/3 of that number is what we call the switcher market, where it's primarily internal use case, employee onboarding and so on and so forth. The way I just simplify the math in that aspect is that if we continue to be the leaders on both external and internal use case, but multiple use cases, we do not need the whole market. But if we continue to maintain the leadership and our 5%, 10% of that market leadership, that is a significant number still ahead of us.
That will be close to $0.5 billion or more in ARR if we just continue to do that and execute. I'm just giving you high-level numbers, but I think what is also important to note is that the breadth of our horizontal nature, if you look at this quarter, what I generally look at more closely also and I'm pleased is that if you look at 2021 to 2023 and now, we continue to be in multiple horizontal departments this quarter. Yes, we called out the big 5 tech customer win, but we had major wins with Enterprise Car Rental, Milwaukee Tool.
We also had some wins that we can call out like the World Anti-Doping Agency. We have a multiple horizontal framework. And then government is coming into that foray. Which again, as we highlighted during Inspire, is a large market. The U.S. federal government last year spent $230 million, in the last 3 years, spent $230 million in LMS spend. It gives you a perspective of that market once we get into FedRAMP certification, and that will open up multiple pipeline opportunities, which we can't participate in today, but it's a matter of a few quarters when we will.
Okay. Super, super helpful. Thanks for those comments today with respect to EBITDA and sort of giving a perspective even with the investments. But as you look ahead, beyond next quarter as an organization, how are you thinking about sort of capital allocation and the run rate of EBITDA? Like is that kind of you're at the point now that you've sort of proven that you can service that operating leverage, and now you're going to sort of continue to sort of maybe pick up your investment in growth? Or how should we think about that over the next 12-plus months there?
I'll start that, and feel free, Claudio and Alessio, to come in. I will say first and foremost, before we speak to EBITDA, growth is the number one and primary objective which we start with. And our investments in R&D and in sales and marketing. Specifically as we called out enterprise segment, government, FedRAMP, we are making those investments and still delivering this EBITDA. It gives you a sense that I kind of gave some numbers to folks that I'd probably give up 2% of my EBITDA this year in FedRAMP certification, which tells you I could have been higher than that if I didn't make those investments. But those investments are necessary to drive the long-term revenue CAGR.
Now I don't provide long we provided some guidance in terms of what we said at Inspire that you can expect this company is more closer to if you are an 81% margin business, and we are exiting in north of 10%, 10.5% that I called out in Q4 and next quarter, then you should expect that this business can continue to demonstrate leverage. And the easiest part here to kind of simplify the math is that you are seeing G&A drop 1% a quarter. There's probably another you should expect us at a $250 million plus ARR to be a business that's generating, that has a G&A of close to let's say 10% or so.
What I'm really saying is that's 7% to 8% coming from G&A operating leverage without even touching sales and marketing and R&D. But as we've spoken about in the past, I think we feel pretty confident about maintaining a healthy revenue CAGR, where growth is the higher component of the rule of 40 and adjusted EBITDA stock free cash flow should be, as we called out in our investor presentation at Inspire, 18% to 20% is not unreasonable in the next few years.
And one follow-up, Richard also, I also look at free cash flow. My apologies, just a quick point. Free cash flow is also important to me. Free cash flow per share is equally important to me. And as you can look at it, that's an important discipline that we've shown that the free cash flow was 18% this quarter and 16% last quarter.
Yes. And about capital allocation from the M&A angle, we have been we became very, very good on tuck-in M&A. I mean, I would love to say that after the acquisition of PeerBoard and Edugo, we have been capable to integrate the team and to release the first alpha version of the new product in less than 4.5 months after the acquisition. We have executed this at the speed of light. For us, tuck-in M&A is something we are becoming extremely good. Probably. We are also open to explore other opportunities without after we have well digested the acquisition that we have made in 2023.
I will now turn the call back over to Claudio Erba, CEO, for closing remarks.
Yes. Thanks, everyone, and let's speak again in the next quarter.
Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines. Thank you.