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Good morning, and thank you for standing by. Welcome to the D2L Inc. Fiscal 2022 Fourth Quarter Results Conference Call. [Operator Instructions]
Listeners are reminded that portions of today's discussion will include statements that contain forward-looking information.,Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from a conclusion, forecast or projection in the forward-looking information. Further, certain material factors or assumptions were applied in drawing a conclusion or making forecast or projection as reflected in the forward-looking information.
For identification and discussion of such risks, uncertainties, factors and assumptions as well as further information concerning forward-looking statements, please refer to the risks identified in the company's annual management's discussion and analysis or initial public offering filed prospectus, each case as filed under the company's profile on SEDAR at www.sedar.com. In addition, during this call, reference will be made to various non-IFRS financial measures, including annual recurring revenue, or ARR, adjusted gross profit, adjusted gross margin, adjusted EBITDA, free cash flow and free cash flow margin and net revenue retention. These non-IFRS financial measures do not have any standardized meanings prescribed by IFRS and may not be comparable to similar measures presented by other public companies. Please refer to the company's MD&A for the 3 and 12 months ended January 31, 2022, for more information about these and certain other non-IFRS financial measures, including where applicable, a reconciliation of historical non-IFRS financial measures to the most directly comparable IFRS financial measures from our financial statements. This morning's call is being recorded on March 29, 2022, at 8:30 a.m. Eastern Time. I would now like to turn the call over to Mr. John Baker, President and Chief Executive Officer of D2L. Please go ahead, sir.
Thank you, operator. Good morning, and thank you for joining us today on our Q4 earnings call. I'm joined by Melissa Howatson, our CFO. After markets closed yesterday, we released our fourth quarter and full year financial results for fiscal 2022, our year ending January 31. You can find details on the investor website at d2l.com. And please note that the results we're discussing today are in U.S. dollars, unless we indicate otherwise. This is our first year as a public company. And I'm happy to report that the fiscal 2022 was an outstanding year for D2L. We successfully completed our public listing at the start of Q4, which provided us a fortified balance sheet to pursue our growth strategy: to capture the growing demand for better learning experience.
We had a record fourth quarter. Q4 revenue was up 22% and full year revenue rose 20%, achieving our target for the year. We grew Q4 subscription revenue by 20% to $36 million and full year subscription revenue was up 19% to $135 million. We added $25 million in net new annual recurring revenue for the full year. That was up 41% from the prior year. And we ended the year with $154.5 million in ARR.
Our results speak to the excellent execution of the D2L team, building great client relationships and the tailwinds in our market. During the year, we built on our strong customer base, adding more than 180 great new clients across our main markets and in all regions. We're up over 19% over the prior year to 1,150. And through these customers in over 40 countries, we reach over 15 million users globally.
In higher education, our largest market, recent wins include the University of Phoenix that selected to D2L Brightspace to support and deliver a wide range of their upcoming competency-based education offerings. They're one of the largest universities in the U.S. We signed a new agreement with the University of Florida's Lastinger Center, an education innovation hub that blends cutting-edge academic research and practice to transform education. And our international team signed a new customer here with the University of Cape Town. It's a top research university and the oldest higher education institute in South Africa. They will use Brightspace to support nearly 29,000 students from over 100 countries.
And a quick update. The State University of New York, a deal that we signed in fall 2021, recently made Brightspace available to their full network of campuses. And I'm happy to report 57 campuses, representing about 370,000 students, started the implementation process at the end of Q4. SUNY is the largest comprehensive system of universities, colleges and community colleges in the U.S.
When we look more broadly at higher education, our pipeline is growing as the need for a modern learning platform remains top of mind with educators. A study we published earlier this year, polling 171 higher education leaders across North America, revealed that boosting enrollment rates and establishing new technology to support online and better on-campus experiences are the key pain points that we need to solve. And our win rates in this market continues to improve. According to a recent report from a leading industry analyst, D2L is the only major learning platform vendor that's growing market share in North America higher education today.
In the K-12 market, which represents roughly 20% of our business and a market that's largely greenfield, our prospect pipeline continues to grow nicely. A key highlight in the fourth quarter was an agreement with the British Columbia's Ministry of Education, which selected D2L Brightspace for up to 670,000 learners across the province. They are now starting to implement for the new school year.
In the corporate market, which represents just over 20% of our revenue, and this is our fastest-growing customer group, it was another productive quarter. We signed up dozens of clients, including the International Sports Sciences Association, which is the leading fitness and exercise certification association, and the Supporting Families Together Association. They are delivering employee training and continuing education programs to membership agencies across the U.S. that will improve the lives of children, so are their parents and child care providers.
And last month, a relatively new corporate client, Canada School of Public Service, went live with Brightspace after a rigorous testing phase. They selected Brightspace to support the ongoing education and professional development of the entire Canadian public service across nearly 100 federal departments and agencies. The client is happy to report that the D2L implementation is the first enterprise-wide modern platform in the entire public service. And we are thrilled that we can help deliver on their mission to support the best possible learning experiences.
The corporate market is a massive addressable market. We are winning in part through targeted use cases such as onboarding, leadership development and competency-based skill development, where we're uniquely positioned. Plus we just launched a new offering in the market, D2L Wave, to provide a better, smarter way to support up-skilling for employees. We are still early days in this venture as our first clients just went live at the end of the quarter. And we continue to expand the academic offerings of micro-credentials and other high-value programs that are meeting the needs of employees and employers.
On the customer retention side, once we land a new customer, we are very effective at retaining them and growing our relationship over time. During Q4, we renewed agreements with the University System of Georgia, Minnesota State and many other large clients as we continued delivering on exceptional learning experiences. Revenue is being retained under long-term contracts as evidenced in the remaining performance obligations, often called backlog, which stood at $359 million at the year-end. That represents 33% year-over-year growth.
Another good measure of success with clients is net revenue retention, which was 107% for the fiscal year-end. This is a great result, and we are emboldened by the fact that we're at the early stages of our up-selling strategies as we continue to invest in new offerings. Our strong NRR and large backlog provide us with a stable, predictable recurring revenue base.
For our go-to-market team, I'm happy to report that we grew the direct sales team by 30% last year. And that included the customer success team with over 40 people who are helping our clients derive full value from our platform as they also generate new opportunities within the large installed base. We're investing in indirect channel partner programs. And that set of partners has doubled over the past 2 years. And we've been rewarded with a 2x increase in bookings from those partners.
With the proceeds from our IPO, our biggest area of investment this year includes the building out of our sales and marketing organization, which is reflected in the outlook that we presented today. The second major area of investment is our R&D to enhance and expand our platform, to bring even greater value to educators, employers and learners and to help us deliver new unit cases to open up new addressable markets.
One recent example of how we continue to lead the market in innovation is our use of artificial intelligence to generate close-captioned videos in multiple languages and to automatically stream them on different types of devices. This makes it easier than ever to use video to create engaging learning experiences.
I'm also excited to report that we have now onboarded Stephen Laster, who joined the company in Q4 as our new Chief Operating Officer to lead our R&D and services team and to support the expansion and evolution of our platform and our offerings. Stephen has over 25 years of leadership experience in digital transformation, product development and technology enablement with a focus in both education and corporate markets. He's been a great addition to the team.
At this point, I'll pass it over to Melissa, who will discuss the financial results in more detail. Over to you, Melissa. Thank you.
Thanks, John, and good morning. As John mentioned, we had a strong fourth quarter to close out an excellent year at D2L. Our full statements and MD&A were filed last night, so I will focus my comments on the key storylines for the quarter.
Total revenue for Q4 increased by 22% to a record $41.4 million. Recurring subscription and support revenue was $36.2 million, up by $5.9 million or 20% over the same period last year. For the full year, total revenue increased by 20% to $151.9 million. And subscription and support revenue grew 19% to $134.7 million. This growth reflects new customer wins, strong revenue retention and expansion from existing customers and the broader effect of accelerating digital adoption.
It was also a good fourth quarter for professional services and other revenue, which increased by 43% to $5.2 million or 12.6% of total revenue. The results for the quarter reflect the significant growth in new customer implementations and content development work for new and existing customers. As we have discussed in the past, our customers really value these services. And we strongly believe there is a high correlation with customer retention and net revenue retention growth. For the full year period, professional services and other revenue grew by 28% to $17.2 million or 11.3% of total revenue.
Cost of subscription and support revenue was $11.1 million in the quarter, consistent with the prior year period. In Q4 fiscal 2021, we experienced increased system usage with learners engaging in fully online learning on our platform during lockdowns. COVID-19 restrictions were less impactful in fiscal 2022 as restrictions eased and many users moved to a combination of blended classroom and online learning.
When paired with realized optimization in our cost of delivery, this resulted in improved subscription and support margin of 69.2% for Q4, up from 63.8% for the same quarter last year. Our platform is well constructed for both fully online learning and blended learning. And we expect this to be the new normal.
Cost of professional services and other revenue was $3.7 million in Q4, up 20% from $3.1 million in the prior year. The increase was driven by higher employee headcount period-over-period, combined with higher subcontractor expenses, which has allowed us to increase our professional services capacity.
Gross profit for Q4 increased by 34% to $26.5 million and gross margin was 64%, up from 58.5% last year. The year-over-year improvement reflects growth in revenue outpacing related increases in cost of revenue, in particular lower cost of delivery for subscription and support revenue. We expect to generate sustainable gross margin improvements over time, driven partly by further optimization of our cloud delivery.
Q4 operating expenses were $30.4 million, an increase of 36% over last year, mainly due to the higher employee headcount to support the business growth. We had more than 1,100 employees at year-end. With a strong balance sheet, our plans call for further investments in talent this year, as John highlighted.
In terms of operating profitability, Q4 adjusted EBITDA was a loss of $400,000 or negative 1% margin compared to a loss of $1.2 million or negative 3.5% margin in the same period last year. The Q4 EBITDA loss reflects the planned increase in our OpEx to support future growth.
We reported negative cash flow loss from operating activities of $4 million in the current period versus negative $1.3 million in the prior year. Cash flow from operations generally have a seasonal low in the first quarter each year and a seasonal high in the second and third quarters due to the timing of annual invoicing with our end customers.
Q4 free cash flow was negative $4.1 million compared with negative $1.6 million in the prior year. The cash flow profile for the current period was affected by one large outstanding customer balance, which you will see in higher trade receivables at year-end. As we highlighted in our Q3 conference call, there were several notable changes to the balance sheet at year-end.
Most significantly, all our outstanding preferred shares, Class O common shares and Class T shares were converted into subordinate voting shares or multiple voting shares. We finished the year with $114.7 million in cash and no debt, leaving the company well positioned to take advantage of the favorable growth trends in our market.
With today's results, we introduced financial guidance for fiscal 2023. Consistent with the expectations outlined during the IPO, we plan to make significant growth investments in fiscal 2023. Specifically for fiscal 2023, we are expecting total revenue in the range of $179 million to $182 million, implying growth of 18% to 20% over fiscal 2022, and adjusted EBITDA loss in the range of $12 million to $14 million.
These should be viewed as a supplement to the target operating model included in our MD&A, which reflects the operating levels we expect to achieve by fiscal 2025 for revenue growth, gross margins, adjusted EBITDA margins and free cash flow margins.
Thank you for participating in today's call. And with that, I'll pass it back to John.
Thanks, Melissa. Our strong fourth quarter financial results concluded a truly remarkable year at D2L. I want to thank the D2L team for their great efforts last year. Education is vastly under-digitized globally, and we are leading the digital transformation of learning. Building the future of work and learning is exciting, and it's never been more vital to our community, companies, campuses and countries.
And now at this point, we'll be happy to take your questions. Operator, back to you.
[Operator Instructions] Our first question today comes from Daniel Chan from TD Securities.
The revenue guidance for growth for next year is, I believe, you said 18% to 20%. It's a little bit lower than the 20% to 25% per year guide you were providing during the IPO. Any color on what's driving that slightly lower growth rate?
So first off, we did achieve 20% for last fiscal year. And we also did see 19% ARR growth last year, which is up from 16% the prior year. And that gives us great confidence in the future. But some of the larger deals, they are going to take longer to translate into revenue, which is why we are guiding 18% to 20%. And our mid-term model of 20% to 25% remains unchanged.
Okay. So I just want to make sure that the guidance largely is due to these -- the timing of these large deals converting and it's not because you're seeing any change to the sales pipeline or demand environment.
That's correct.
Okay. That's great. And then the 20% to 25% revenue growth mid-term target, that's still per year beyond fiscal '23, correct? It's not something that you're trying to achieve by fiscal '25?
Yes, that's right. Our mid-term target for both fiscal '24 and '25 remains unchanged.
Okay. That's great. Margins this quarter came in a little bit better than expected. Just curious what was the driver behind that?
Yes. So we're really pleased that we're tracking ahead on our gross margins. We've seen continuing progressive quarters of improvements in gross margins. Our cloud migration was completed 2 years ago. And so that's allowing us to make that focus on those ongoing optimization. We've also seen product usage patterns starting to normalize compared to what they were at the beginning of COVID. Users are still in the system. But as they change between the blended and online, that does have some impact. So we're pleased with that.
Our next question today comes from the line of Christian Sgro from Eight Capital.
For my first question today, I wanted to ask your opportunity to expand ARR within the current base, I know there's some bigger deals out there like SUNY and in BC. But quantitatively or even qualitatively, what do you see as the opportunity to just expand within all of your customers today?
Thanks, Christian, for the question. We definitely see an opportunity within our base to expand ARR both by an up-sell strategy that's in the very early stages as we continue to develop these new offerings around Engagement+ and Performance+, which will drive the better experiences for our clients. As that strategy kicks into gear, that's some opportunity for us to grow the net revenue retention with our clients and to continue to expand within the base.
And then as for the big deals that you spoke to, including like SUNY and BC, some of those do take time to translate both to ARR and into revenue as the implementations progress and as the adoption picks up. But there's significant opportunity and room for expansion there. BC is a good example. BC is a usage-based contract, which means as they go to implement and as they start to use the product, that's when we're going to start to recognize them in both ARR and revenue. But until that point, we leave them out.
That's helpful. I'll ask a follow-on there on the up-selling different products. I think at the time of the IPO, 1/3 of customers have subscribed to Brightspace Core and then at least one other add-on package. So John, could you talk about any other trends here? Are you seeing more offtake of those other modules?
That's still consistent quarter-over-quarter. It's still 1/3 of our customers have one or more modules added to their Brightspace Core. As I said earlier, it's very early days in terms of our up-sell strategy. And as we continue to invest in those products, which is a big priority for our R&D teams this year, we should start to see that attach rate continue to grow over time, which will drive revenue, which will drive ARR.
Okay. Perfect. And then one more question from my end. There's been good traction today with the Canadian government there with the CSPS. And I saw on their Twitter, they're through 100,000 accounts live on D2L. And they're calling it a success there so far. I just want to hear from your perspective, talking about the scaling there and what you're seeing with that customer.
Yes. It's a great customer. It's, from what I understand, the first enterprise modern cloud platform the government has rolled out. So it's a great success story for both us and for the government. And it also opens up a brand-new market for us. As you can imagine, that market requires a considerable investment to support a big enterprise rollout, security, data privacy and so on.
And for us, that means opening up the broader government markets throughout not only Canada but globally, and certainly opening up other markets like regulated industries, like the banks, or other groups that really care deeply about having a very reliable platform to use to support learning. So we're very excited about the opportunity that presents. And there are many other agencies within government that we can now go leverage that contract with.
Our next question comes from Thanos Moschopoulos from BMO Capital Markets.
John, you referenced strong RFP activity, which is consistent with commentary from your peers. So if we look at the pipeline and how that's evolved over the last 3 months, I mean, any key trends you would call out? Has it been sort of consistent growth? Has there been any sort of uptick in certain areas? In terms of the RFP activity, any themes that you would call out there? Or just interested with the overall secular trends that you previously talked about.
Well, we are definitely seeing an increased tailwind in our core higher education market. So as you can imagine, as COVID hit, most universities weren't rushing out to buy an LMS and switch from one platform to another. But what we're seeing now, as students return to campus, as these universities and colleges have more time to be more planful to put in place a better learning infrastructure, and faculty as they return to campus are not going to want to teach both online and face-to-face at the exact same time.
So there's a need for these universities to put in place a better support system for their faculty, better support for their students to be able to deliver an exceptional experience both on-campus and online. And that demands investments. And that's what we're seeing. We're seeing an uptick in the RFPs. We're seeing our clients having more conversations with us about projects that were put on hold for the first couple of years of COVID. That activity is now returning, and we're excited about that being a new tailwind for D2L.
Great. And then as far as international geographies, I mean, obviously you had the win in South Africa. Can you speak to how the pipeline is evolving? And I mean, outside of Europe -- I mean, certainly Europe, obviously the biggest part of international. But beyond that, I mean, where are you seeing good level of pipeline?
So we're seeing good growth in pipeline in almost every one of our regions internationally. So certain regions, it will be up or down depending on the quarter. But overall, international still set for good outperformance for this fiscal year that we're in and also -- well, demonstrated good results the last year as well, too. I think if I remember quickly, I gave you examples in previous conversations with analysts around the Philippines or Latin America, the Netherlands and many other different markets globally that we're competing in.
These are markets that are again very early days in terms of their adoption of high-quality digital learning experiences. The competitor set is weaker than what we see in North America. And it's on us to go out there and capture as much of that opportunity as quickly as possible, move them to a modern cloud platform that gives them a better learning experience. And the team is very excited to really accelerate that again this year.
Great. And then finally, you obviously gave us guidance for the full year. But as we think about the OpEx ramp and the timing of hiring, anything to call out in terms of that data? I mean, should the ramp in headcount be pretty linear throughout the year? Or is it more front-end loaded? Just any color on that would be helpful.
In terms of the hiring, it's obviously a very competitive market on the hiring front. But our team is doing a really good job in terms of outperforming, as we saw last year, growing our headcount to 1,100 people. We do expect the headcount to, in many cases, be front-end loaded. In certain departments, it may take a while to ramp into a full headcount that they're looking for, for the year. But we are certainly trying to unload some of the work that we're doing on sales and marketing to make sure that we've got lots of time for those folks to ramp through the year.
And I have one...
Sorry, go ahead.
No, you go ahead. Go ahead, John, sorry.
Yes, I think the other maybe point that we should make is that we just hired our COO at the end of Q4. He's now very focused on executing his hiring plans for the organization. And so we are expecting to move fairly swiftly on the hiring that we need to execute well this year.
Our next question comes from Brian Peterson from Raymond James.
John, I wanted to start with you, just maybe following up on that RFP commentary for higher ed. I'd be interested to know if the university prospects are maybe looking at things a little differently post COVID, right? I think there's been a traditional demand for LMS to replace on-premise solutions. But are they looking at doing things differently, different types of learnings, where maybe your products would be better positioned? I'd just be curious what your thoughts about.
It's a great question, Brian. And the quick answer is yes, the presidents and leadership that I'm talking to within the universities and colleges are looking to invest today to improve the educational experience, both on-campus and online, so new models of learning like competency-based education. I think we gave a great example there today with the University of Phoenix selecting D2L to support a competency-based framework for their online learning. University of Phoenix, as you know, is a leader in online learning and are now selecting D2L to support that next wave of innovation, moving up that adoption curve to really drive a better experience for their students.
That's what we're looking for today. We're looking for clients that really want to invest now to provide that best quality experience for their students, both online and on-campus. And that's a big pivot. Most campuses in the past would have been looking for minimum viable just to support faculty on campus. This is a big change and bodes well for D2L. And I think it shows up in the reports that we're seeing from the analysts, showing our win rate continuing to improve in this space.
Good to hear. And maybe a follow-up for Melissa. Just on the outlook, how should we think about that in terms of being maybe a reasonable bogey for this year? Or would there be potential conservatism? And if we were to see any upside, would that be reinvested in growth? Or would we see that fall through to the bottom line?
Yes. Great question. So I think when you look at our growth in our ARR over last year, we did add $25 million. That's up 41% from the prior year's numbers. So that -- the ARR that we have is good forward-looking information in terms of giving confidence in future revenue. And so is there a potential upside? There always could be some potential upside.
But with that forward-looking visibility, we do want to make sure that the numbers we're giving are -- that we can feel very confident in them. And if we were to overachieve on that, we would look at the reinvestment. But really, we've already settled the plans for the reinvestments we think we need to drive the growth. So the likelihood would be that they would start to fall out into bottom line EBITDA sooner than what our plans otherwise would have had us do.
Our next question comes from John Shao from National Bank.
My first question is I'm just curious about the relationship between your SaaS revenue and professional services revenue, which is quite strong this quarter. So to what extent is the PS revenue leading indicator to the subsequent SaaS revenue?
That's a great question. I think it exemplifies the fact that we've built a great relationship with our clients, that they're now leaning in to do these special projects to help them outperform in terms of support for a great experience, both for on-campus and online. And it is largely a leading indicator for future growth as more professional services tends to mean more adoption of new technologies in the future.
Okay. And the other question from me is for your newly added headcount in sales and marketing, how long does it take for new salespeople to break even and potentially generating new lease and revenue contribution?
We have really done a good job in terms of building a world-class enablement organization within D2L. We continue to make improvements, as you can imagine, year-over-year. But the typical sales rep, as they come onboard, is around 2 or 3 months that they're really good. 6 months, it would probably be on the outside. So 2 to 6 months would be a good range to give for getting a new sales rep fully productive in our market.
Okay. And last one for me is with additional headcount and resources in sales and marketing, should we expect the sales cycle to be shortened or relatively stable over time?
We're seeing good growth in the pipeline. And as we add more sales and marketing resources, it should have a positive impact on growing our pipeline even more as we launch these new campaigns, as we fully deploy the new branding that we've just done, building that awareness and seeing that translate to better digital conversions, if you will. These are all good investments to help us grow pipeline and have high-quality opportunities flowing into the sales organization. So yes, those investments will translate to a better pipeline in the future.
[Operator Instructions] We have no further questions in the queue, so I'll hand back to John for any further -- for any concluding comments.
Thank you, Emily. Thank you for joining us this morning, and thank you for your support and interest. We are very much looking forward to updating you on our progress after our next quarterly call for our Q1 results. Thank you, everyone. Have a great day.
Thank you, everyone, for joining our call today. This concludes the conference call, and you may now disconnect your lines.