LifeSpeak Inc

TSX:LSPK

Earnings Call Transcript

[Operator]

Good morning, and welcome to the LifeSpeak First Quarter 2023 Results Conference Call. [Operator Instructions]Before we start, we would like to remind you that all amounts discussed in this call are denominated in Canadian dollars unless otherwise indicated. Please note that statements made during this call may include forward-looking statements and information and future orientated financial information regarding LifeSpeak and its business and disclosure regarding possible events, conditions or results that are based on information currently available to management, which indicates management's expectation of future growth, results of operation, business performance, and business prospects and opportunities.Such statements are made of this date here off and LifeSpeak assumes no obligation to update or revise them to reflect events, disclosures or circumstances, except as required by applicable securities laws.Such statements involve significant risks and uncertainties and are not a guarantee of future performance or results. A number of these risks and uncertainties could cause results to differ materially from the results discussed today. Given these risks and uncertainties, one should not place undue reliance on the statements and information.Please refer to the forward-looking statements and information and future orientated financial information section of the company's public filings, which include without limitation, LifeSpeaks' MD&A and its earnings press release issued today for additional information.At this time, I would like to turn the call over to Michael Held, Chief Executive Officer of LifeSpeak. Please go ahead, sir.

[Michael Held, executive]

Thank you, operator, and welcome to the LifeSpeak First Quarter 2023 Results Conference Call. The LifeSpeak team continue to win new customers, diversify our revenue base and further the company's objective of becoming the world's leading digital wellbeing solution. These operational successes are reflected in our strong first quarter financial results, which our CFO, Mike McKenna, will discuss in greater detail later in the call.We have arrived at this position by realizing a number of years ago that the market was asking for one trusted source that could provide mental health, physical health and caregiving solutions that could effectively address the wellbeing needs of employers, health plans and other organizations.For too long, a fragmented market existed that inefficiently addressed these needs or didn't address them at all. Through targeted M&A, we believe we have addressed that need by strategically layering on leading physical wellbeing, caregiving and substance abuse tools through our digital mental health education platform.These acquisitions completed in 2021 and 2022 provide LifeSpeak with a holistic product suite that has allowed us to effectively become a one-stop shop for organizations that require preventative digital education and human expertise to support employees and end users. This holistic approach drove a number of key business development accomplishments during our first quarter.Our number of clients was 990 as at March 31, 2023, an increase of 13% when compared to 873 as at March 31, 2022. Within our core enterprise client base, select client wins in Q1 included UMB Financial in the U.S., Cenovus Energy in Canada, NYU Langone Health in the U.S., BBA Inc. in Canada and BP Corporation of America in the U.S.Partnerships and embedded solution client work continued through the first quarter and subsequent to quarter end with the highlight being the closing of a US-based transaction with Medikeeper, servicing Blue Cross Blue Shield of Massachusetts.During our first quarter, our overall cross selling initiatives progressed with the successful closing of several cross-sale, multi-product opportunities, including with Manitoba Blue Cross and with Health Canada. The success was largely driven by the official and successful launch of the Torchlight product into the Canadian market and the initiative we're very excited about and I'll continue to update you on in the coming quarter.With these types of projects underway, the company anticipates continued growth going forward, driven by net new clients with multi-product solutions and as the current portfolio of client cross-sell opportunities continue to materialize. Overall, we are very excited about the opportunity that lies ahead of us and believe that we are making significant progress on all fronts.I will now pass the call to our Executive Chairman, Nolan Bederman, who'll provide some more color on the quarter. Nolan?

[Nolan Bederman, executive]

Thanks, Mike. We remain highly confident in the outlook for [Technical Difficulty]. We've worked diligently over the past several quarters to integrate the 4 acquired businesses Michael mentioned, into LifeSpeak, and have now successfully built one fully unified organization. We've successfully rationalized our cost every quarter since closing our acquisitions through strategic streamlining without compromising the key levers for growth within the business. We've successfully leveraged the relative strength of each company and have been able to pool and share resources and talents to strengthen the company's combined capabilities.The net result is that our customers now have a well-positioned partner with nearly 20 years of experience that can uniquely address whole person wellbeing through various integrated solutions. Beyond focusing on building a strong platform that can holistically address an individual's needs, we also strengthened our financial position in the first quarter, with the announcement of a new investment from Beedie Capital, an existing shareholder, comprised of a $15 million non-revolving convertible debenture.Concurrently, we entered into an amended and restated credit agreement with our senior lenders with revised terms that better position us for future growth. Both agreements provide LifeSpeak with additional flexibility and runway to advance our strategy of becoming the world's leading SaaS-based total wellbeing solution. We're very fortunate to have such supportive partners.We believe that our core business remains fundamentally strong. And while we are in a business environment where corporate spending is more measured, all of the long-term macro tailwinds continue to drive market need and continue to support increased scale and diversification both in terms of our geographic presence and our client base. We're taking advantage of this period to further enhance and strengthen our operations and go-to-market teams and believe we are very well positioned to win.While we have a lot to accomplish through 2023 and beyond, we're confident that we have the team and product in place at LifeSpeak to help the company continue to grow and lead the industry. We're keenly focused on the disciplined execution of our strategy and are looking forward to demonstrating the efficacy and efficiency of our integrated platform as we update you on our progress in the coming weeks and months.I'll now turn the call over to Mike McKenna, who will walk us through our detailed financials. Mike?

[Michael McKenna, executive]

Thank you, Nolan. We continue to believe our quarterly financial results demonstrate the underlying strength and diversity of our business, and I'm thankful for the opportunity to share these results with you today.Our revenue for Q1 2023 increased by 54% to $13.4 million. That's up from $8.7 million in the first quarter of 2022. Annual recurring revenue or ARR is now $53.3 million. This is a 4% increase compared to the first quarter of 2022 and highlights the moderate growth expected for the quarter as discussed on our Q4 conference call. ARR for the first quarter was very positively impacted by the addition of a multitude of new enterprise clients as well as some expansion within our existing client base.Of our $53.3 million of ARR, approximately $44.6 million came from our 972 enterprise clients. With respect to our continued geographic diversification, approximately 66% of this ARR now originates from markets outside of Canada. For quarterly comparative purposes, we report ARR on a constant currency basis and use a [ 1.30 CAD:USD ] exchange rate to calculate this ARR.Given our exposure to the U.S. dollar and the movement in currency and exchange rates over the past number of quarters, we think it is also helpful to note that if we were to adjust for the strength of the U.S. dollar, our ARR would have been approximately $54.7 million as at March 31, 2023.Importantly, this ARR base continues to be very well diversified and no customer accounted for more than 5% of ARR as of March 31, 2023. While overall ARR has grown approximately 4.4% year-over-year, it is very important to note that our enterprise ARR base has grown by approximately 14% during the same time period.Both our Q1 financial results press release and the Q1 MD&A provide further detail on the enterprise and embedded solutions breakdown for the quarter on -- and on a historical and pro forma comparative basis.Moving on to adjusted EBITDA. Our commitment to operational efficiencies provided the company with a strong adjusted EBITDA of $3.7 million in the quarter. This is an increase of approximately $3.3 million over the first quarter of 2022. The 27.5% adjusted EBITDA margin for the quarter is very strong when considering the macroeconomic operating environment.As I noted on the Q4 call, the Q1 margin was to be lower than the reported metric as at Q4, which included a number of one-time add-backs paired with some one-time revenue that was recognized during Q4.Overall, we are very pleased with the continued strength of our EBITDA margin, which is a very important metric for the business. The 27.5% for the quarter is well in line with a focus on 30% or greater for the fiscal year. It highlights clearly that the dedicated efforts to operating the business with efficiencies following our period of acquisitions is working very well.We have a baseline operating expense profile that is established, being managed consistently, and has the business positioned to scale.As part of our continued focus on operational efficiencies, we are pleased to announce that during the quarter, we realized approximately $1.4 million of additional annualized synergies. This brings the total annualized cost synergies realized since we announced our plan to rationalize costs following acquisitions to approximately $11.1 million.Moving on to net income or net loss for the quarter. There was a small net loss for Q1, which amounted to approximately $354,000. This is significantly less than the Q1 of 2022 net loss of $16.2 million. This is largely due to the absence of costs associated with acquisitions, but does highlight that the continued cost rationalization efforts and growth in the top line are positively impacting the income statement.In addition to the previously mentioned metrics, we closely track other key performance indicators to help us evaluate the strength of the business, and these include gross profit margin.Our gross profit margin for the first quarter of 2023 -- excuse me, our gross profit for the first quarter of 2023 increased to $12.1 million. This resulted in a gross margin of 90%. This is 5% higher when compared to Q1 of 2022. Net dollar retention rate, NDR, provides a consolidated measure by which we can monitor the percentage of ARR [ obtained ] from our existing clients.As it was in 2022, consolidated NDR remained affected by the reduction in ARR from one large enterprise -- sorry, embedded solutions client and higher-than-normal churn following the acquisition of Wellbeats. Consolidated NDR will reflect the impact of the loss of large embedded solutions customers until Q2 of 2023.With that in mind, our NDR was 87% as at March 31, 2023, on a consolidated basis. This is approximately 5% higher when compared to our Q1 2022 consolidated NDR of 82% and 11% higher than our consolidated Q4 2022 NDR.To provide better insight into the underlying performance of the portfolio, the NDR for our enterprise clients was 93% as at March 31, 2023. This again demonstrates the continued strength of the underlying enterprise customer portfolio that we have built and continue to maintain.While overall churn has been higher than originally anticipated over the last 12 months, operationally, we are very focused on seeing strong progress -- operationally, excuse me, we are focused on this and seeing strong progress in our customer retention strategy.Logo Retention Rate. Logo retention, which is measured on an LTM basis, was 83%, which, as I noted in my earlier comment regarding Logo churn has been higher than we would typically expect over the last 12 months.Of note, however, in Q1, our average enterprise client ARR added was higher than the ARR of the customers churning from the platform, showing the continued strength and growth opportunities within the enterprise segment. This is a theme that I have consistently mentioned on previous quarterly calls and continues to contribute to our overall ARR growth.Moving on to the outlook for Q2 of 2023. Similar to the outlook provided on our Q4 call and based on the company's current pipeline visibility and the continued execution of our business strategy, we continue to anticipate moderate growth in revenue, adjusted EBITDA and ARR through the second quarter of 2023, similar to the first quarter of 2023.An important trend we are seeing in the enterprise segment is the opportunity for increased size of customer contract wins. This is both in general terms and on specific partnership opportunities where new multi-product sales are creating several opportunities that the company would not have been capable of attaining historically.We are now positioned to pursue much larger enterprise deals due to the strength of the platform and multi-product approach. The enterprise pipeline, both in number of deals and size of partnerships, remains strong and continues to grow.Moving on to capital structure. With respect to our capital structure, this is an element of the business that we continually monitor to ensure it can support the growth-oriented nature of the business.As discussed on our previous quarterly results call, at the end of Q1, we entered into an agreement with Beedie Capital for a non-revolving convertible debenture, $15 million. Importantly, this carries a 2% cash interest payable rate in 2023, which helps to lower our overall interest costs for the balance of the year. Beedie has been a long-term supporter of our business, and we are excited to have further involvement with them as we continue to chart a path of strong future growth for LifeSpeak.To provide with further detail on the amended senior credit facility, under this amended agreement, the company will have minimal amortization payments in 2023, totaling just $1 million through the balance of the year. We have also reduced 2024 obligations to amounts that can be easily managed by cash flow from operations.Furthermore, we have also reached an agreement with the Wellbeats selling shareholders, which has resulted in a very material reduction of the potential contingent consideration payable from the Wellbeats transaction, settling the earnout and a payment of approximately $1.3 million.These prudent financial transactions, combined with our highly efficient and predictable cost base will materially decrease the previous burden on the company's cash flows through 2023 and 2024.With that, I would like to thank everyone for their participation on the call today. And we will now open the call to questions. Operator?

[Operator]

[Operator Instructions] Our first question today comes from the line of Doug Taylor from Canaccord.

[Doug Taylor, analyst]

I'd like to ask a question about the composition of your enterprise customer base. I mean you still are seeing some churn with smaller customers as you migrate to higher or larger and more sizable enterprise customers.Can you give us maybe a view into the proportion of your customer base that's still in that category of smaller, potentially more at risk so that we can get a sense of when your overall growth metrics might turn more firmly positive to reflect the strong enterprise pipeline you just spoke about in your prepared remarks?

[Michael McKenna, executive]

In terms of getting too far into the specifics, the actual percentage, look, there is still a portion of the customer base that is, if you want to call it, for the $10,000 of ARR or less. I wouldn't consider all of that customer base, frankly, to be at risk either. I think that's important, right? So yes, there's been a bit of a trend. We've identified this trend over the past few quarters, also identifying the offset to that trend with the focus on larger customers and in fact, a significant number of wins on the larger customer side, sort of to offset the loss.So I think, is this a trend that we can still sort of potentially see some challenges with through the next couple of quarters? Potentially, I think there's a number of things we're doing operationally. I think that we've got just different level of focus on trying to ensure that we can manage the trend better as well. But I think overall, we should be generally through the vast majority of this.So again, without getting into too much specifics of like it's X number of customers, I think we're generally speaking, pushing forward with the objective that this -- there's something that sort of runs its course here in the next couple of quarters.

[Doug Taylor, analyst]

So maybe if I just -- we step back from that then and just say, given your pipeline dynamics that you talked about and what you see as the churn hurdles over the next couple of quarters, should we be expecting a gross inflection point starting in Q2, Q3 from perhaps the pace that we saw in Q1?

[Michael McKenna, executive]

Yes. I think Q3, right -- I think Q2, I sort of mentioned it there in the prepared remarks, it's going to be very similar to Q1, right, with some moderate growth. And then -- and I think certainly, the trends that we're seeing support that to be further supplemented in Q3 and Q4. So I think the outlook for the rest of the year remains strong in the sense that we're certainly seeing significant opportunities on the sales side within the pipeline.But I think sort of back half of Q2 into Q3, that's probably a little bit more -- without getting too precise on timing, Doug -- but I think that's the view, I think, overall.

[Doug Taylor, analyst]

And then against that, I mean, you continue to layer on these additional synergies or cost reductions here in the first quarter. I mean, I think I asked this question last quarter, but do you still believe that there's more that you can do on this front as you kind of chart your course back to the north of 30% EBITDA margins?

[Michael McKenna, executive]

Yes. Look, I think at this stage, Doug, the real uptick in EBITDA margin is going to come from top line growth. As I mentioned, we feel like we've got a very consistent and very well-managed cost base. In fact, if you look at the -- just the total G&A and sales and marketing costs in Q3 of last year and the Q1 of this year, they're pretty consistent, almost very close to the same number, right? There are some things that have moved around a little bit on the income statement just from an accounting perspective, which frankly impacted the gross margin a little bit in this quarter.But I would say, overall, like we're pretty consistent. Can there be a -- is there a little bit more? Potentially. But I don't think we want to keep sort of having that as a dependent factor for driving EBITDA margin. Again, I think we're very happy with the consistency of the cost base and what the current company dynamic, employee base has us set up for from a growth perspective. So the uptick is really going to come at the top line.

[Operator]

The next question today comes from the line of Paul Treiber from RBC Capital Markets.

[Paul Treiber, analyst]

Just wanted to speak about the macroenvironment. I mean, you did mention that you're seeing some changes there. Can you speak to how that may be impacting or not your pipeline or sales cycles or conversion rates?

[Michael McKenna, executive]

I'll start briefly on this one and then turn it over to my colleagues for a little bit of commentary as well.I think generally speaking, the pipeline continues to remain very strong, and we're seeing, again, good consistency on the enterprise side with especially some of these more sizable opportunities that we continue to talk about. Most certainly, the sales cycle has seemingly lengthened. There has been stuff that seems to be sort of delayed quarter-to-quarter, right?That said, we're not hearing a lot of people sort of say, hey, we have no interest in the product. It's a little bit more about timing. And so we are monitoring this consistently week-to-week in terms of performance metrics within that pipeline, size of the pipeline, conversion rates, et cetera.So we're very consistently working through what the pipeline looks like. So I think overall, we're very strong in terms of managing where we're going with that. But I think, yes, we are inevitably seeing a little bit of a delay in terms of decisions being made, which obviously contributes then to the length of the sales cycle overall. So I'm not sure -- Michael, I don't know if you have anything else you'd like to add there. But I think that's certainly a trend, Paul.But again, our ARR is hanging in there pretty consistently well as well. So we are adding pretty significantly through the ARR base as we manage through some of this churn, right?

[Michael Held, executive]

HWe're not seeing nos , we're seeing delays. There's no evidence at all. In fact, I think the contrary relating to the tailwinds are also there around mental health, micro learning, digital health. So like we're seeing what we want to see, which is why the pipeline is growing, but in the spending -- corporate spending environment, people, their budgets are getting delayed. So we've -- we're coming up to 20 years of LifeSpeak. We've been through this before. We know what it looks like. It's also followed by a bump in our services.So we're just doing everything we can to make sure we're well armed for when that bump happens, when people start spending more vigorously. But there's nothing underlying that's concerning other than we wish people were spending more than usual instead of less than usual. But I think that's where it lies.

[Paul Treiber, analyst]

Switching gears, looking at embedded clients in the ARR. There was a dip this quarter. I know it's less of a focus now. How do we think about embedded going forward? What resources are you putting there? Or how do we think about it in the interim here?

[Michael McKenna, executive]

I think one of the things with the program there as it relates to the overall embedded solutions, the issue there has never been defining customer opportunities. Really, the challenge that we faced has been time-to-market ramp-up strategy, right? So we certainly have repositioned some internal resources to attempt to get a little bit more, frankly, from the deals that we already have. I mean, we've got 18 deals there in the works ramping. So there's a pretty good base, right? It's just really a matter of getting the most from those,right?The counterparties there continue to be consistently very good, very strong, health plan oriented type customers. We're also doing a lot -- little bit more work internally with some sales resources to try to see, again, if there's additional opportunity in there. But I think right now, really, the focus is on getting the most out of those deals that we have, taking some of those learnings and continuing to develop the strategy. It just has proven to be a little bit longer taile than we would have hoped or expected.But again, I think the strength of it, again, with the counterparties that we have in that area -- the counterparties haven't really changed. They continue to remain the same strong names that we've mentioned over time with a few additions here and there. But again, we want to try to maximize the value of that portfolio going forward.

[Operator]

The next question today comes from the line of Jerome Dubreuil from Desjardins.

[Jerome Dubreuil, analyst]

Just first on the cross-sell initiative. Just wondering how do you measure the success of that initiative? Do you have internal metrics regarding maybe the attach rates or revenue per user? Just curious to see how you think about the success of cross-selling?

[Michael McKenna, executive]

I'll start, and maybe Michael, you can add a little bit with me as well. But I think, Jerome, the key point really is multi-product, right? And so there's 2 ways to look at that. The customer base that we have, or had previous to the acquisitions that we made and then looking at the number of those today that have multi-product, as well as just now the go-to-market strategy. And I think that's really important because the go-to-market strategy now can be much different than it was when we put together some of the initial customer base, right, that we can now actually go-to-market with the multi-product.So it's really -- sort of, it's really twofold. It's not necessarily, Jerome, about -- down to the individual user level because our contracts, frankly, aren't structured that way. But it's really about, okay, what should we do within the existing base to add products, and then what can we do with new customers to start from a base with multi-products, and it's really monitoring both of those opportunities within our pipeline.So Michael, I'm not sure if you have anything to add on that in terms of where we are just in terms of go-to-market, even with some of the rebranding and stuff that we've done. But I think that's really -- a good focal point going forward is really, Jerome, the second part of what I mentioned as it relates to how new customers with multi-products go and contribute to our overall pipeline.

[Michael Held, executive]

And I think there are 2 elements. Obviously, at the end of the day, we're a business. So new revenue from cross-selling is the most important. We're seeing a very high uptake on new demos, especially with the caregiving solution in Canada. It's a particularly hot topic, and we're seeing -- so now we need to convert that pipeline and those demos into new sales.I think the other metric, Jerome, that we'll look at is, the more products we have, the stickier we are with our clients because we're solving more issues for our clients with one vendor. And so I think the thing we will measure over the long term is also the reduction in churn that results from us being the one-stop solution for many of their pressing issues.So right now, measuring it, it's all pipeline, new demos, proposals, and we're starting to see good revenue. But again, I strongly believe we'll see a reduction in churn as well as the other initiatives we're doing, but from this aspect alone.

[Jerome Dubreuil, analyst]

And just for a bit more color because one of the KPIs we've been looking at in the past was obviously the number of customers. But has there been maybe a reallocation of the sales force towards maybe more focus on this cross-sell and maybe the number of customers shouldn't be seen as being as important going forward? But the main question here is really has there been a reallocation of sales force?

[Michael McKenna, executive]

Yes, Jerome, I think that's really important. Just in terms of ensuring that we are going after -- again, it doesn't all have to be 100,000-plus employee-based type customers, right? But from a cost of servicing revenue, right, one of the differentiation factors for our business in the market is just the service level we provide to the customers following the sale. And so, frankly, if a customer has 500 employees or 5,000 or 10,000 or 20,000, they're going to get the same level of service from us from an analytics perspective, from a communications perspective, from a promotional perspective, from additional opportunities to access the platform perspective.And so that sort of contributes to a cost of servicing that revenue, right? The cost of servicing revenue for us for a 25,000 to 50,000 customer or frankly even well beyond is actually the same as the much smaller customers. So the trade-off there, frankly, is okay for the business. So look, do we want to have a situation whereby we're sort of seeing a downtick in total number of customers? Not at all. All that to be said -- And again, that's why I pointed this trend for the past 3 quarters, 4 quarters now.If we're adding more higher-value ACV customers or multi-product customers, as Michael just spoke about, this actually, from a cost of servicing perspective, is actually healthier for the business, and that's why you're seeing, frankly, consistently -- if you go back to -- all the way back to Q1 of last year, pretty consistent uptick quarter-over-quarter in the EBITDA margin, right, from a service perspective.So I think that's important. It is a bit of a trade-off I think frankly, one we're willing to make. Obviously, we understand the importance of cash flow in the business as it relates to servicing our debt obligations and the like. So that -- I think it's an important trade-off that we're willing to make.

[Jerome Dubreuil, analyst]

Just making sure we're looking at the good KPIs here. And then lastly, on the synergies, maybe if you can provide a bit more color on where the most recent synergies has come from since you've delivered, I think, more than most of us would have thought initially? So yes, more color on this would be appreciated.

[Michael McKenna, executive]

Yes. Look, I think as we get further and further into integration, I mean we've been able to find some overlapping of duties and some overlapping of functions. And so, it's really just continuing to be, frankly, quite focused on this area, Jerome. And at the same time though, I think, making sure that we're not overcompensating from a perspective of trying to drive margin.I think we have very much strived -- we've been striving, excuse me, to get to this very much consistent and manageable cost base quarter-over-quarter on a cash operating basis, and ultimately, ensuring that the base that we have continues to allow the business to be positioned for scale. I think that's really the most important takeaway from this.So are we going to be, frankly, in the coming quarters continuing to sort of discuss synergies? Obviously not as much, given the vast majority of that -- the time frame and the integration, we should be through that.I appreciate your point that we've been able to achieve more than most would have expected. But again, I think importantly, right, what we've tried to get to is, again, that consistent manageable cost base that still has the business ready and positioned for success with some of these new initiatives that we've got going on the sales side, some additions on the sales team.This business probably from a growth perspective is more well positioned now than it ever has been as well. And so, I think that's important, just from a people perspective, that as we're managing this, we're also ensuring that we invest in areas that are going to allow us to scale going forward.I'm not sure, Michael, if you have anything you want to add there. But I think, Jerome, the key things that from a sort of, let's call it, a financial reporting perspective, obviously, in the quarters going forward, we'll have less emphasis on this because we're very much well through the majority of this transition.

[Michael Held, executive]

I mean the only thing I'd add, Mike, I think that's worth noting on the synergies is we have been able to, at the same time, increase the quality of our team. So we feel really good about that. So we've done that in a pretty cost-effective way, but it ties a little bit back to your prior question. We have more sales people who can sell more products, and that makes your sales force more efficient. So there are things like that, that we've been able to do, that we're pretty pleased with, that actually can moderate our cost or maintain our cost and at the same time strengthen some of our capabilities.

[Operator]

The next question today comes from the line of Justin Keywood from Stifel.

[Justin Keywood, analyst]

Similar line of questioning on the margins, but also just tell how it relates to churn? Because the gross margin is pretty healthy at 90%. And I'm just wondering if any of the clients that are leaving the platform, is price a consideration at all? Or is it individual circumstances of the company?

[Michael McKenna, executive]

Look, I think individual circumstance and, frankly, price, sometimes both, are actually related. We do hear as it relates to some -- well, a lot of customer churn, we do hear things around budget. And that is a bit of consistent feedback. And again, I think, consistent theme sort of over the last few quarters is that where that budget theme sort of seems to be a bit more prominent is in some of the smaller enterprise customers. And so, I think that's important, is that the individual circumstance or, frankly, the budget component piece, they're actually quite related, I think in -- we're seeing it more prominently, I think, in some of the, let's call it, smaller enterprise segment.

[Justin Keywood, analyst]

And then just on the geographic breakdown. Not sure if I saw that in the release, but Canada versus U.S., just general growth trends and how you're seeing those 2 different markets?

[Michael McKenna, executive]

I don't think the growth trends, Justin, are changing too much. If you were thinking about our business today in Q1 on an ARR basis, about 66% of that coming sort of outside of Canada. That was 64% if you go back to Q3 of last year. So it's not so much, frankly, that one is necessarily outpacing the other. I do think there are overall more sizable opportunities, obviously, as the platform goes and some of these trends that we consistently talk about in terms of going after larger enterprise customers. Naturally, some of those are going to be in the U.S. So that's going to maybe slightly shift some of that mix.But I think generally, the pace remains relatively consistent in both markets. But what we are seeing is potentially, in some cases, with some of this larger enterprise opportunity, just naturally more of those going to be in the U.S.I'm not sure, Michael or Nolan, I don't know if you want to add anything to that, but I think that's the general trend that we're seeing overall.

[Justin Keywood, analyst]

Yes, I think that's good summary.

[Operator]

the next question today comes from the line of Jeff Martin from Roth MGM.

[Jeff Martin, analyst]

I wanted to get a sense -- I assume you're still measuring engagement with the content. That was a big part of the attraction of the business during the IPO. What are you seeing in terms of engagement trends with the users across physical wellbeing, caregiver support and [ substance, please, ] would be helpful.

[Michael McKenna, executive]

I'll start, and then Michael and Nolan can add some thoughts to this as well. But I think absolutely, engagement is something that we're consistently looking at tracking, frankly daily in a lot of cases just to ensure that we're on top of trends. I'd say overall engagement is remaining strong. We are working diligently with our customers monthly, quarterly, semi-annually, again, depending on customer preference to ensure that we're actively communicating with their employee base where possible to help manage engagement.I think you asked specifically about the caregiving business. That's one area where we're really seeing increased opportunity, both engagement wise and with the product. Michael mentioned earlier that we've just brought that product to Canada and launched that product specifically in Canada. And frankly, part of that was driven by just the trends that we were seeing from a user engagement perspective and underlying metrics with that business having previously only been in the U.S., but just with their customer base. So I think that's important, and that was a trend that we saw that sort of helped make that decision.So I think that's a real key focus for us across the entirety of the platform and something that we're, again, consistently looking at day-to-day, week-to-week, month-to-month to ensure that we can improve where needed.

[Jeff Martin, analyst]

And then in terms of the cross-sell, what is -- maybe if you could characterize. I'm sure it's not an easy thing to do. But when you're looking at cross-selling, what do clients -- what is their common denominator that they're initially looking at? Mental wellbeing and then layering in caregiving, is there a common theme there that seems to be an attractive in terms of converting pipeline? That's what I'm trying to get at there.

[Michael McKenna, executive]

Guys, why don't you take a crack at that one and then…

[Michael Held, executive]

Sure.

[Michael McKenna, executive]

we can talk. If we don't get you enough detail, Jeff, we can always follow up. Mike, go ahead.

[Michael Held, executive]

We very methodically acquired these companies because these categories, we believe, are the main categories of services that our clients are looking for, whether it's caregiving or physical well-being or mental health. So really, when it comes to cross-selling, all of our clients that have one offering are in the market for other offerings. And so this gets back to our thesis of clients are looking -- prospects are looking for one vendor. So I don't think there's a trend of layers. I think there -- we're very consistently seeing, regardless of the solutions that pre-exist with any of our clients, they're willing to look at and very eager to look at the other offerings. So we don't see a trend in that -- in an ordering.If I were to say, one trend we're seeing in particular is that caregiving is an extremely hot topic. I think physical well-being is table stake. So there's a lot of opportunity there. Mental health remains very strong. And anyone that listens to the radio or watches TV, it's not going away. But we're seeing particular interest in caregiving and there isn't the same competitive set in that regard as well. We believe we can very quickly dominate in Canada. There is not the same competitive set in the U.S. where we also have a great position.So that's what we're seeing. We're seeing eagerness across the entire portfolio, but a particular trend in caregiving where we're very uniquely set up to succeed.

[Operator]

The next question today comes from the line of Gavin Fairweather from Cormark Securities.

[Gavin Fairweather, analyst]

Just to zoom in on the budgetary discussions you talked about seeing some constraints there. Curious if you're seeing that kind of across the customer side spectrum, so SMB to enterprise, or if that is more of an SMB factor right now?

[Michael McKenna, executive]

I can start. We really are seeing that more on the lower end. I'm not necessarily certain we would characterize it sort of as SMB. I think it's important to -- just to level set in terms of, again -- the sort of lower end target range for our customer contracts generally would be in and around the range of 500 employees. So if you consider that SMB or less, maybe certainly in the U.S. market. But that's sort of the lower end in terms of where the product would be ideal and then moving up the spectrum from there.So I think 2 things. One is that's – that lower end of the employee count size is really certainly where we are seeing some of the more budgetary pressure. But I think it's also important that, that's also helping us sort of understand where we should be allocating sales and partnership resources, right, as we go forward. So that's also -- there's a little bit of repositioning going on within the team and within focal points for salespeople to ensure that, also as we're adding customers, we're not necessarily spending amount of time there that doesn't create ROI, right?So I think that there's -- it's important for us to sort of see the trends and then also adapt to them.

[Gavin Fairweather, analyst]

And then just secondly for me. I know prior to its acquisition by TELUS, LifeWorks was a pretty important referral partner for you. And I think when the deal was announced, you mentioned that maybe this could lead to some upside for you. So curious how that partnership is going? Are you starting to see better traction? Are they kind of distracted by the deal? So how is that partnership functioning now, now that we're kind of 6 months into the deal?

[Michael McKenna, executive]

Look, I think Michael is best positioned to talk about that. And I think -- the -- it's a good question in terms of timing, but overall, it's going well without getting into quantifying too much. So over to you, Michael, on that one.

[Michael Held, executive]

Yes, sure. There was definitely -- they were distracted as they should have been. It was a large acquisition. But we are, without getting at this stage into specifics, but there are a number of trends where we are increasing our opportunity lens. There's quite a bit going on with the U.S. that we feel very confident about, which is not where we've been succeeding with them in the past. So that's excellent. And again, without getting into it, there's some evolving discussions around adding product suites to the relationship.So they continue to be a great partner, seem very engaged, and there's a lot of activity. So we're back in business. And I think we'll see a lot of good success over the coming year.

[Operator]

Thank you. There are no additional questions waiting at this time. So I'd like to pass the call back over to Nolan for any closing remarks. Please go ahead.

[Nolan Bederman, executive]

Thanks, everyone. We just wanted to once again say that we appreciate everybody's attention, focus, good questions, and we look forward to continuing to share our progress with you. So thank you all very much.

[Operator]

This concludes today's conference call. Thank you all for your participation. You may now disconnect.