Q3/24: PERFORMING WELL IN A CHALLENGING MARKET
THE TD COWEN INSIGHT
Strong revenue growth, ARR growth, and expanding margins in an environment that continues to be plagued by long sales cycles and restricted budgets is a testament to the company's execution and momentum. FedRAMP certification remains in the hands of its counterparties, but continued traction with SIs in the enterprise segment are likely to sustain growth. Top pick, PT goes to $63.
Impact: SLIGHTLY POSITIVE
See our previous note for a review of the results.
Steady macro. Management noted that the macro environment remained stable, but challenged with longer enterprise sales cycles and a cautious SMB customer base. We are, however, seeing signs from other enterprise software and services vendors that the environment may be improving. We believe this would be positive for DCBO, especially given the traction it has been having with its SI partners, Deloitte and Accenture.
SI contribution growing. SIs are playing a significant role in DCBO's growth and move upmarket. ~30% of DCBO's pipeline is from SIs; we believe this can continue to build considering we believe channel partners are using DCBO as one of the lead LMS solutions they're going to market with. SIs are also giving DCBO broader geographic reach, as evidenced by wins in the EU, and broader sector reach, including the public sector.
Enterprise momentum continues. KPIs suggest that DCBO's move upmarket continues to progress well. ACV was $54k, up from $53k q/q. We believe ACV could further expand with the continued move upmarket, price increases, and new product launches. Mid-to-large enterprise customers grew 25% y/y, while enterprise ARR accounted for 58% of gross ARR generated in the quarter, up from 50% q/q.
The company generated $4.5mm of FCF in the quarter. FCF was lighter than usual due to payments to vendors and the adoption of semi-annual bonus payouts. We believe the company is well-capitalized with $82mm of cash and no debt to invest in organic growth, share repurchases, and tuck-in M&A.
Minor changes to the model. DCBO's enterprise success has two potential impacts: 1.) DCBO generates less PS revenue as SIs take on that work and 2.) sales cycles could further lengthen as some of these deals are large transformation projects. We believe the large insurance win was one such project. We have consequently lowered our PS revenue estimates. Our subscription revenue assumptions remain relatively unchanged as we expect an improving macro to potentially offset longer sales cycles from larger deals. We also expect higher margins from leverage and cost savings from automation.