D2l Inc Stock

Hello, everyone. Thank you for joining us, and welcome to D2L Inc. Second Quarter 2027 Financial Results Digital Conferencing Call. After today's prepared remarks, we will host a question-and-answer session. [Operator Instructions]

I will now hand the conference over to Craig Armitage, Investor Relations. Craig, please go ahead.

Good morning. Thank you. 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 a 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 company's annual and interim management's discussion and analysis and the most recently filed annual information form, in each case as filed under the company's profile on SEDAR+. In addition, during the call, reference will be made to various non-IFRS financial measures, including adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross margin and free cash flow. These non-IFRS financial measures do not have any standardized meaning 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 quarter ended July 31, 2026, 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.

I'd now like to turn the call over to Mr. John Baker, Chief Executive Officer of D2L. Please go ahead, John.

Thank you, Craig, and good morning, everyone. Thank you for joining us for our second quarter fiscal 2027 earnings call. We released our financial results after market close yesterday, and you can find those materials in the Investor Relations section of our website. Please note that all amounts discussed today are in U.S. dollars unless otherwise stated. I'm pleased to be joined this morning by Josh Huff, our CFO.

Our second quarter results reflect both strong bookings quarter and the anticipated impact of the previously disclosed U.S. K-12 customer churn. While this affected our headline growth metrics for Q2, the underlying performance of our core business remains solid. And with this headwind now behind us, we expect improved revenue growth and profitability as we move through the second half of fiscal 2027.

For the second quarter, subscription and support revenue increased 2% to $50.9 million. Annual recurring revenue, or ARR, increased 5% to $223.4 million. Adjusted EBITDA was $6.5 million, and we repurchased approximately 2 million subordinate voting shares during this quarter, while maintaining a strong balance sheet with $106.4 million of cash and no debt. As you will see in our Q2 disclosure, we have adjusted revenue guidance for the full year based upon softness in our advisory services and the delayed launch of a new customer. Josh will get into this in more detail shortly.

Importantly, excluding the K-12 market, ARR grew more than 10% year-over-year, our fourth consecutive quarter of double-digit ARR growth across our core higher education and corporate markets, which account for more than 90% of our revenue. This performance reflects healthy bookings, strong competitive win rates and our success in expanding customer relationships through the broader D2L platform.

In our largest market, higher education, our competitive position continues to strengthen. We continue to displace each of our major competitors as institutions globally look to modernize their learning environments and prepare for the future of learning. In North America Higher Education, our new customers in the quarter included the School of Professional Studies at Brown University, a member of the Ivy League, as well as Golden Gate University and Southwestern Michigan College. These wins reinforce the importance of our platform and product road map among institutions as they make big long-term decisions about their learning technology.

Internationally, our momentum continues to build in key markets. During the quarter, we added customers, including the Continuing Professional Development unit at the University of Leeds in the United Kingdom, Van Lang University in Vietnam and IESB in Brazil. And subsequent to quarter end, UNSW Sydney selected D2L Brightspace as its next-generation learning platform. UNSW is one of the top 20 ranked universities globally. This is a flagship win for D2L as we start Q3. We see a significant long-term opportunity internationally as institutions around the world modernize their learning platforms.

Before moving on, I'd like to briefly touch on the K-12 market. This has been a challenging last 12 months with the U.S. K-12 market, where we've experienced significantly more churn than normal. We don't take that lightly, and we're committed to delivering better results moving forward. Beginning in Q3 of this fiscal year, we expect the retention and growth trends to continue to normalize in K-12, and we're pleased to report that our remaining K-12 customer portfolio is strong. Engagement remains healthy, and we're seeing encouraging new opportunities and new logos emerge.

Beyond education, we further expanded our presence in the corporate market. New customers this quarter included the American Society of Safety Professionals, the Royal College of Anaesthetists in the United Kingdom and the Public Service Alliance of Canada, one of the Canada's largest unions representing close to 250,000 workers. These wins highlight our ability to support workforce development, professional education and member learning at scale. New customer acquisition remains an important growth driver, and we're also creating value through the expansion of the D2L platform with our existing customer base.

Creator+ continues to gain traction as customers look to create more engaging, interactive and accessible learning experiences, highlighted by an adoption rate of more than 35% among existing customers. We're also seeing increasing momentum for our AI offering, D2L Lumi. During the quarter, D2L Lumi surpassed $5 million of ARR and is attached on greater than 40% of new customer deployments within global higher education. And we're working hard to broaden adoption with existing customers as well. This demonstrates that AI is contributing to both sides of our growth strategy and strengthening the value proposition for new customers while creating additional opportunity to expand relationships with existing customers.

We also see evidence that educators are moving beyond the initial exploration and discussions about AI to now focusing on practical implementation. In research conducted by our team earlier this year, educators consistently emphasized the importance of AI tools that improve learning outcomes, enhance teaching effectiveness and are deployed in a trusted and responsible manner. We believe this feedback validates our strategy of embedding AI in ways that help educators and learners achieve better outcomes while maintaining strong foundations of trust, privacy and accessibility.

These themes were reinforced at Fusion 2026, our annual customer conference, where we welcomed more than 1,100 attendees from all around the world. One of the clearest messages from our customer conversations was that institutions are looking for a practical path forward as AI continues to reshape learning. Customers recognize the potential of AI, but they want to move forward thoughtfully. They're focused on responsible implementations, protecting institutional and learner data and ensuring that technology contributes to meaningful learning outcome improvement. More broadly, institutions are looking for a trusted partner that can provide both stability and innovation as they navigate this evolving learning landscape.

At Fusion, we introduced new AI-powered innovations and platform enhancements across D2L Brightspace, Lumi, Creator+ and H5P. These included new capabilities designed to help customers transform existing learning content to be more engaging and to improve outcomes, translate content into new languages and provide learners with Lumi Learner Mode for more personalized support and embedded knowledge checks.

Overall, we're encouraged by the performance across our core markets. And while our current growth profile has been affected by the previously disclosed U.S. K-12 attrition, we continue to see strength in bookings, customer expansion and AI adoption. We are well positioned for improved revenue growth and profitability through the balance of fiscal 2027 and into fiscal 2028.

With that, I'll turn the call over to Josh to review the financial results and to talk about the outlook in more detail.

Thanks, John, and good morning, everyone. As John noted, our second quarter results reflect continued growth across our core markets, together with the anticipated impact of the previously disclosed U.S. K-12 customer churn. As expected, Q2 represented the period of greatest impact on our reported growth rates. While these factors affected our near-term financial performance, the underlying performance across our core higher education and corporate markets remained solid.

Total revenue increased 2% to $55.6 million. Subscription and support revenue increased 2% to $50.9 million, reflecting growth from new customers and expansion with existing customers, partially offset by higher than typical U.S. K-12 churn experienced over the past 12 months. In addition, the current quarter was affected by the delayed go-live of a new customer deployment, resulting in approximately $0.8 million impact to subscription and support revenue in the quarter and is anticipated to be live by the end of this fiscal year.

Annual recurring revenue increased 5% to $223.4 million and in constant currency increased 6%. Reported ARR in Q2 was impacted by the final major component of U.S. K-12 churn as previously disclosed and in line with our expectations. As John highlighted, excluding the K-12 market, ARR increased 10% year-over-year and on a constant currency basis increased 11% year-over-year. Professional services and other revenue was $4.7 million, consistent with the prior year. We continue to see a softer demand environment for advisory engagements within our professional services practice, while remaining confident in the value these services can provide to clients.

Turning to margins and profitability. Adjusted gross margin was 70.4% compared with 70.6% in the prior year period. As previously disclosed, the database technology work was completed during the second quarter, concluding the associated incremental costs incurred over the past 12 months. This positions us to report improved gross margins in the second half of fiscal '27 and moving forward. Adjusted EBITDA was $6.5 million or 11.6% of revenue compared with $7.5 million or 13.7% of revenue in the same period last year. Adjusted EBITDA reflected the previously discussed revenue impacts as well as planned investments in sales and marketing, including our annual Fusion customer conference held in Q2.

Importantly, the broader progression of our business remains consistent with the first half, second half framework we outlined at the beginning of this fiscal year. As we move through the second half of fiscal ' 27, we continue to expect higher revenue growth, expanding gross margins and meaningful adjusted EBITDA margin expansion. The midpoint of our updated guidance implies approximately 7% subscription and support revenue growth and a 16% adjusted EBITDA margin in the second half of the year, a significant improvement relative to our Q2 results.

Moving to net income. We reported a net loss of $3.1 million in the second quarter compared with net income of $2.7 million earned in the prior year period. The primary driver of this change was a noncash fair value loss of $4.8 million related to the loan receivable from SkillsWave. As required under IFRS, the loan is measured at fair value each quarter. Updated assumptions reflecting SkillsWave operating results, financing environment and credit risk resulted in the fair value being reduced to 0 as at July 31. This fair value adjustment does not change the underlying loan, which remains in place and secured.

Turning to cash flow. Cash flows from operating activities were $28.8 million in the second quarter compared with $15 million in the prior year period. And free cash flow was $28.5 million in the second quarter compared with $15.2 million for the same period last year. The year-over-year increases primarily reflect working capital movements, including strong customer collections during the quarter. We believe the trailing 12-month period provides a more representative view of the underlying cash generation as it normalizes working capital movements between quarters. For the 12 months ended July 31, free cash flow was $42.7 million versus $24.1 million in the comparable trailing 12-month period, showing significant progress in scale. Our financial position remains strong as we ended the quarter with $106.4 million of cash and cash equivalents and no debt on our balance sheet.

In terms of capital allocation, we completed our previously announced substantial issuer bid during the quarter, repurchasing approximately 1.9 million subordinate voting shares. We also repurchased about 131,000 shares under our normal course issuer bid during the period. As a result, we repurchased a total of approximately 2 million shares during Q2, and we'll continue using the NCIB over the balance of this year.

Looking across a longer period, we have now repurchased more than 3 million subordinate voting shares through the SIB and NCIB combined over the trailing 12 months. This represents 11% of the opening subordinate voting shares outstanding during that period. We believe our use of these programs reflect a disciplined approach to capital allocation. We have been able to meaningfully reduce our share count and return capital to shareholders while maintaining a debt-free balance sheet and significant financial flexibility to continue investing in our organic and inorganic growth opportunities.

Turning to our outlook. We have revised our revenue guidance for fiscal '27. We now expect subscription and support revenue of $211 million to $213 million, representing growth of 6% to 7% over fiscal '26 compared with our previous range of $212 million to $214 million and total revenue of $228 million to $231 million, representing total growth of 5% to 6% over fiscal '26 compared with our previous range of $231 million to $234 million.

The revised revenue outlook reflects softer demand within our advisory professional services practice as well as the delayed go-live of a new customer deployment and the corresponding impact on subscription and support revenue in the current fiscal year. Ongoing optimization of our cost of goods sold and operating efficiencies is offsetting the impact of the lower revenue outlook, allowing us to maintain our adjusted EBITDA guidance of $33 million to $35 million, representing an adjusted EBITDA margin of approximately 15% at the midpoint. As John highlighted, we continue to expect meaningful improvement in our financial profile during the second half of fiscal '27.

Looking beyond the current year, our fiscal '28 target operating model remains unchanged. We continue to target revenue growth of 10% to 15% and an adjusted EBITDA margin of 18% to 20%. We recognize that achieving these targets requires a meaningful step-up from our fiscal '27 performance to date. Our confidence is grounded in 4 consecutive quarters of double-digit ARR growth in our core markets, a strengthening competitive position, continued international expansion, increasing customer value through products such as Creator+ and D2L Lumi and the diminishing impact of the churn and COGS headwinds that have affected our reported results the past few quarters. These targets remain a clear priority for the team, and our focus is squarely on executing the plan to deliver higher revenue growth, expanding margins and increased cash generation.

With that, we'll open the call to questions.

[Operator Instructions] Your first question comes from the line of Erin Kyle with CIBC.

I guess first one here is just on the K-12 churn in the quarter. I'd say that the magnitude of the churn was larger than what we had anticipated. So maybe if you can kind of comment on the size of the contract there or average contract size across K-12 in your broader markets? And then maybe just as a follow-on, do you have any other large contracts that are similar in size to this one that could be up for renewal in the next few quarters here?

Yes. As we had discussed in previous quarters, Q2 effectively had that sort of final tranche of churn during this sort of 12-month period where we've had higher levels of churn than normal. And so the amount of churn from K-12 in the quarter was actually in line with our expectations and plans. We are pleased to report that go forward, we do expect K-12 to return to normal retention and growth effective Q3 and sort of have this ARR headwind behind us.

I think the other sort of mechanical thing within ARR is always FX as well. So in the quarter, just to be clear, there was a $2 million haircut on ARR from FX. And so when you sort of reconcile each of those data points, we actually added net $6 million of ARR from our core business in the quarter, which is a decent Q2.

And then, Erin, just to add a little color to the K-12 market. I spent a lot of time visiting them with our clients over the course of the last 12 months as well. And by and large, the rest of the client base is very solid. So there are other large clients. For example, most of Canada uses D2L as a learning platform, New Zealand, New York City, many others. And so there are still large clients, but the clients that are -- that remain are very solid, growing and engaging heavily in terms of new technologies to support a better learning experience. So very confident in our go-forward strategy with K-12. And keep in mind, this is now less than 10% of our overall revenue.

Maybe just a follow-up to that, John. Just on the differences in the U.S. K-12 market and Canada and international, is there anything you can call out more specifically on why you have the confidence that this is contained to U.S. -- like the nuances of the U.S. K-12 market, I imagine, are different than Canada, for example. So maybe if you could just put some color around that.

Yes. I think just generally speaking, there's no secret that the overall U.S. K-12 EdTech spend is down significantly year-over-year. In our case, what we're seeing in markets like Canada, Canada is ranked #3 in the world, for example, in education for K-12. There's a real investment in making sure that their students have the best technology to support a really great learning experience that helps them achieve even better results year-over-year. So there is a real investment in cutting-edge technology to support student learning. And we're seeing that in other markets around the world.

It's not to say that that's not existing in the U.S. I just want to be clear on that. There's just been a general pullback on technology spend across the U.S. in the course of the last 2 years. And at some point, we hope that, that will bounce back. And in the meantime, we're digging in deeply with the clients that really care deeply about improving educational outcomes for their students.

That's helpful. And then maybe I'll just ask one more on the deferred implementation that you called out. Can you expand a bit more on the reason behind that deferral? And then in your view, is the delayed implementation, do you feel it's company-specific or customer specific to that particular account? Or is it -- do you think it could be expanded to other contracts as well?

No, this is very specific to one individual account. It's a very large one, as you can tell by the change in guidance for the year. It's just sliding the go-live into end of Q3 from where we expected it to be much earlier. And it's just a very large complex implementation that required custom software development, and there was a fairly significant change of scope of that software development. So until that implementation is done, it's very hard to sort of go live with all this, in this case, close to 1 million users. And so when that does go live later this quarter, we're quite excited to start to recognize the revenue after that point forward, which is part of why we're seeing the confidence in the revenue acceleration in the back half of the year.

Your next question is from the line of Doug Taylor with National Bank.

John, I'll ask you to maybe comment on the pipeline. You obviously had a strong Q2 for core higher education growth. Can you talk about the momentum and the conversion rates that you think about and what's required to get to your refreshed guidance now for this year and as we think about next?

Yes. The guidance change for this year really has very little to do with the pipeline. It's really just recognizing revenue in year. What I'm excited about is actually the pipeline. Even in a tough macro market with RFP volume down, we're seeing our win rates continue to climb in our core higher education market in particular. We're seeing flagship wins like UNSW Sydney is a great example. It's a top 20 university globally.

And it's not just in one region. We're seeing wins in many different regions around the world. And so I'm very bullish on the team's work on the pipeline. We're not done yet, Doug. There's a big effort ahead of us to really fire up a replacement cycle to encourage clients to move to an AI-first learning platform. But I'm confident over the course of the next few months, we'll get that really started to fire up because what we're seeing now with our clients is close to an order of magnitude improvement. So the combination of our learning services with Lumi, with Creator+ is really having a major impact on improving educational outcomes. So completion rates are going really high up, which for a university, for example, if they can improve completion rates for retention of students by 10%, that's tens of millions, possibly hundreds of millions for some of our bigger clients.

And so that's compelling just by itself, but we're also saving a tremendous amount of money in terms of development of high-quality learning experiences. And at the same time, what we have is an environment where students are really desperate to have a better learning experience because they're up against students that may be using other technologies to sort of write an essay or to do some of the work, and they want better learning experiences to actually have a better outcome for their own career, for their own progression in life.

And so all these, I think, are going to turn into a tailwind for us as we look ahead. And that's starting to show up in the pipeline. We're seeing healthy pipeline generation, but the work is still being done to really start this replacement cycle in the market. That will drive our RFP volume with our high win rates, that will be a very compelling event.

You've talked about these high win rates and a lot of the success you've had has come, I guess, at the expense of some of your legacy competitors. But as you use Lumi and AI as a competitive differentiator in future new wins, can you maybe talk about whether there's been a change here in the budget that some of these institutions are willing to allocate towards investment in that technology versus just replacing legacy systems?

I think that's the part that we have to unlock in the back half of this year is really helping these institutions understand the value that can come from these technologies. I would imagine most don't realize they can get an order of magnitude improvement by implementing these technologies to support a better learning experience. They just don't have that connection yet. So we have a big education effort ahead of us. But I think it is very compelling. I don't think there's any budget issue from all the clients that I'm speaking to. They have budget for AI. They have -- there's no sticker price issue with our technology.

Key now is trying to figure out the unlocks to get them to buy it as quickly as possible. We're seeing good attach with new clients, which is very encouraging, over 40% buying it right out of the gate. We're seeing the attach rate for existing clients ticking up, but we want to see it tick up much, much faster. We might -- I know it sounds strange, but we're happy with the growth that we've seen so far in the first half of the year with Lumi. But the back half, we're hoping to really start to accelerate the growth.

Okay. And one more for me. Maybe this one is better suited for Josh. I think you've done a good job articulating the short-term headwinds that you faced in recent quarters. You also did, in your prepared remarks, reiterate the 10% to 15% growth objective as we think about next year. You do have some lingering stubs you'll be lapping from K-12, FX and perhaps the PS, professional services setup. Can I maybe just get you to talk through some of those things, the puts and takes as we think about the growth profile into next year?

Yes, absolutely. Appreciate the question. In Q2, as we mentioned, sort of always had a bit of this trough dynamic. And so as we look forward, into the second half of the year, we'll start to see some accelerant this back half. In the -- implicit in the guidance, you kind of can math into a 7% subscription growth in the second half and a 16% EBITDA margin in the second half. But also, as you mentioned, those headwinds abating on the K-12 front, we'll see that most readily in ARR starting Q3 and beyond. It will effectively be a sort of clean representation of adds.

And then on the margin front, the COGS work has actually sort of exceeded our expectations slightly. And so we start to see in the back half of this year already a bit of a step-up in our margin profile, and that will continue into next fiscal. And I'd say more importantly, it really comes down to looking at sort of that core business performance. We look at that ex K-12 ARR growth being low double digit the past 4 quarters, 11% this past quarter. Win rates are strong. International continues to tick at about a 15% growth profile.

As John mentioned, we continue to see a really good opportunity with Creator+ and Lumi. So all of those things are sort of getting us comfortable with our plans to step up into that F28 operating model. And certainly, we're committed and focused as a management team to getting there.

Your next question from the line of Gavin Fairweather with Cormark.

Maybe just to start on Australia. I think you've added some sales investments in recent quarters and nice to see the UNSW win coming through subsequent to quarter end. So maybe you can just refresh us on your view of the market structure in Australia and your ambitions in that market in the years ahead.

Yes. It's not just Australia. Australia is one of many markets which are now really coming to life for us as a company. What's interesting in Australia is up until recently, we did not have a lot of wins in that region in higher education. We had great clients, great proof points. The market was largely Canvas and Moodle. And we're now starting to see the momentum shift in that market to us with almost 2 big wins. UNSW is a fantastic one, a great school, very committed to really having a big impact on improving the student learning experience, a very prestigious institution, and I think they're going to be a great partner.

University of Otago, another great example of New Zealand. There's some fantastic new wins in that region, really great clients. And I think it's also a good example where all these institutions are also using H5P in that region as well, too. And so you get this cross-pollination of great experiences. But that institution, in particular, did a very detailed diligence review of our platform and us as a company to make that decision. And I think it's going to be hopefully an example for many other prestigious institutions from around the world to make similar choices in the year ahead.

I think that market dynamic is playing out, whether it's in Singapore or Netherlands or South Africa or many, many other countries around the world. There's not just an isolated spot or example, if you will.

That's great. And then maybe just turning to the corporate side, further momentum this quarter on the membership side. I know that a goal of the company is to push more into employee training. Maybe just you could provide us with an update there. I know there's been a lot of product work underway, and you've hired some new leadership. I know it's probably not going to impact the back half of this fiscal year, but maybe just update us on the strategy and progress heading into fiscal '28.

No, I think you're still seeing fantastic growth there, especially for training organizations, where their members need a fantastic learning experience to support those training organizations continue to support their mandates and drive additional revenue for those organizations. So that's a very strong part of our business and growing quite quickly. We continue to invest across all of our markets in terms of developing new product, new technologies to really support us making sure that we can continually expand the market opportunity that's in front of us.

And I remain very bullish on corporate being a critical market for us because as you can imagine, any time that all these industries are going through this big transformation, they're going to need upskilling and learning. And we're the best platform for them to deliver that to their members. And we're quite excited to see the new clients coming on board this past quarter and very bullish on the opportunities in front of us with the new leadership and also the expanded team.

Your next question is from the line of John Shao, TD Cowen.

So in terms of the Lumi ARR, it's good to see that 40% growth in just 2 quarters. And I understand the attach rate for new customers is relatively high. So my question is, how do you plan to drive a higher attach rate among your existing cohort? Is more of a conversation at renewal? Or is this -- or the conversation already happened?

The conversation is typical for renewal. That said, the impact that Lumi has now with clients is so significant, they should be embracing it today. They shouldn't be waiting. And so I'm actually personally sitting down with the team to understand all the key objections that get in the way of people trying to buy Lumi today and see if we can figure out how to knock them back as quickly as possible.

John, like this is a technology where if they implement it, all of a sudden, you can do things like translate this content into different languages. You can automatically take a Word document and convert it into a beautifully engaging interactive learning experience with interactives and flash cards and quick knowledge checks on the bottom of every page. It just makes learning so much better for students. We now have closing in on 10 different efficacy studies that demonstrate the impact that it has in terms of improving educational outcomes. And then our learning services team has actually figured out ways to really drive down the cost of developing all of these courses as well.

So the combination of those 2 things is so compelling for clients. It's literally almost 10x better than the way that they've been doing it so far to date. And any time you get a product to the point where it's 10x, that's compelling enough to put in place the purchase today. There's little to no risk attached to these clients putting this technology. The clients that have embraced it have had a tremendous impact on their businesses, and we just need to get the word out, I think.

Got it. And in terms of your PS revenue guidance this quarter, I'm just curious, is the weakness largely discretionary or cyclical? Does it reflect a structural change in how customer purchase your PS services? My understanding is that you have shortened the deployment cycle. So what is the implication maybe for your future PS revenue going forward?

It's largely just on advisory services. It's not on the implementation side of it. I just want to be clear on that. And it's largely just softness in a particular quarter. It's not an overall major trend here. I think the overall services for professional services has just largely been flat for a couple of years now. We saw a big spike up during the pandemic, as you can imagine. I'm not sure why it isn't going up to the right, to be honest. It doesn't need to if we can drive the ARR adoption without it going way up. We're not counting on services, if you will, is a big revenue driver.

But we think there's tremendous value in that team. That team, as I said earlier, can unlock the ability for you to 10x improve the educational outcomes for your students. And so why wouldn't you engage with them? And so similar to Lumi, I'm sitting down with the team to try to figure out what are the blocks in terms of getting this adopted more widely. And again, for clarity, there are great clients that are engaging with this team to drive really incredible results with their programs, and they come back and buy that service over and over again. So it's not like there's not great case studies. There's fantastic case studies there. We just need to make more of our client base aware of this great service.

Sometimes it's not just the technology, it's the combination of technology and people that really have a big impact. And I think one of the things that we're going to try to do is really think about how the advisory services group could be thought of almost as forward-deployed engineers that are out there helping clients embrace these new AI technologies, these new approaches to building courses. And that might be part of the way that we spike that revenue back up in the back half of the year and into next.

Your next question from the line of Thanos Moschopoulos with BMO Capital Markets.

John, with respect to your increasing win rates and if you look at some large marquee wins you've had like with -- in Australia, I imagine these are very complex RFPs where there's a lot of criteria that go into the selection process. But is there -- is a lot of the increase in win rate been due specifically to some new capabilities like Lumi? Or are there a lot more ingredients that go into it, encompassing the overall strength of the platform and other factors?

Well, I think similar to other wins that we've seen in the past, it's many factors that are playing into why they're selecting us. Lumi is certainly a big factor. It may not be in the actual RFP itself, but as you're looking at implementing these technologies today, you want to pick a partner that's going to have the right solution in place for the next 5, 10, 15, 20 years. And so you want to pick somebody that's not just got the right product today, but has the right engineering, the right mindset, the right approach to design, the right approach to AI that's going to enable you to be successful many years into the future. And I think we spoke about the University of Ottawa previously, where they did a major renewal over a decade long after doing a similar in-depth review. So it's across all these factors, support, partnership, innovation, road map, AI, the learning experience.

I think the other big factor that's playing in is the work that we're doing around the content experience. So students are looking for a better educational journey. They don't want to read just big blocks of text or big PDF files or big Word documents anymore. And so the ability for us to take that and transform that into a really engaging interactive experience is something that's very popular with a lot of our clients today. And we have, again, very compelling differentiation there with Creator+ with H5P and now with Lumi as an AI agent that's helping them leverage these other technologies, you're getting this beautiful stacking of these technologies together to really have a big impact for these clients.

So it's -- I wish there was just like one thing that's compelling to everybody, but it's actually all these factors that are super compelling for them.

Great. On K-12, recognizing that that's a small portion of the business now, now that you're through this churn, would you expect that segment to still remain a drag on overall corporate growth? Or is there an opportunity for that to maybe approach growth rates more similar to the overall corporate average?

I think there's an opportunity for it to return to the average. The base that we have is very strong. The impact that we're having with those clients is big. And K-12 is going through a very similar transformation as every other sector that we're working in, in terms of how they deliver their great educational experiences. And so our technology is perfectly suited for that market. But again, it's a small base. It's much easier to grow on a small base, and we do believe our product is a great fit for that market long term.

So does it get the same attention as the other 90-plus percent of our business? It's -- proportionately, I think it's a fair investment that enables us to keep that base very strong and enables us to potentially return to it not being a drag, but hopefully supporting the growth long term.

Your next question is from the line of Brian Peterson with Raymond James.

Josh, one for you. Just on the K-12 churn side, is there any way to kind of help us understand when that was reflected in ARR over the last few quarters? And I say that not because you guys size it, right? So we can kind of look at the ARR growth rate. But I just want to make sure I'm tracking kind of the sequential change and when that started to impact results maybe a few quarters ago versus now?

Yes, for sure. So Q2 was sort of the final tranche. And as we sort of articulated the data points in an earlier question was sort of the largest batch. And so we started to see that impact rev rec in Q2. And so there would have been a bit of a gradual step-up over the past sort of 3 quarters where we would have seen an impact on rev rec. We still see a bit of that, obviously, impact in the back half, which is why, as mentioned, implicit in our guidance is a 7% subscription growth profile and not something more reflective of our ex K-12 ARR growth rates just yet. But that's sort of the time line and magnitude and impact.

Okay. And John, maybe one for you. Can you just remind us like -- and I understand like you and maybe Instructure have pretty good market share in North America. But as I think about internationally, like how much of those systems are still on legacy platforms? And as you think about that pipeline to move to kind of cloud-based solutions, has AI accelerated that growth? I just would love to understand maybe the size of that opportunity and any momentum you're seeing there?

Yes, it's a great question, Brian. So like international, we've seen, again, be about 15% growth rate for us on ARR, which is fantastic. I think that can continue to maintain or accelerate even because it's not just a move to cloud. I think with 80-plus percent still on legacy, I would argue 90-plus percent because I would lump Canvas into the legacy mix now. I think there is a very compelling opportunity internationally. And international, as you know, is making up a bigger and bigger part of our base. So as that continues to accelerate, it gives us very good confidence that we can achieve our 10% to 15% next year in terms of overall growth.

I want to be clear, it's not just cloud. It's this transition to an AI-first learning platform. In the past, we would compete and we would try to be like 3% better or 5% better. I think the combination of our learning services plus Lumi, plus Creator+, plus some of these other technologies that we brought to bear is now putting us in a position where we can almost be 10x better, not 3% better, but significantly better than what they're using today in terms of improving educational outcomes and driving down costs.

So that, I think, opens up a big replacement cycle globally because if an institution can save that much money or retain that much revenue, then the cost of our technology becomes almost free. And so we do want to lean into international in a much bigger way. And that said, we still see tremendous opportunities for growth in North America. We just been -- it's been held back a little with the K-12 churn in the U.S.

Your next question from the line of Essey Tesfay with Stifel.

Your next question from the line of Ty Sullivan with RBC Capital Markets.

Just on the light revenue for the quarter, you called out the $0.8 million delayed go-live as well as softer advisory services. Were those sort of the 2 main contributing factors? Or was there anything else at play during the quarter?

Yes. The sort of bridge from a lower subscription growth profile in Q2 versus sort of the norm would be a combination of the K-12 drag, the delayed go-live and then sort of relative to initial expectations, the non-USD foreign exchange rates have had more pressure relative to what sort of our expectations were at the start of the year. And so that's taken a chunk out of sort of Q2 as well as full year expectations on subscription.

Okay. That's helpful. And just on the guidance for the year, obviously, revenue guidance was lowered, but EBITDA guidance was maintained. Where specifically do you expect the offsets to come from in the back half of the year? And do you expect more contribution from the gross margin side or the OpEx side?

Yes. So a good chunk of the revenue reduction was professional services, which has a lower gross margin profile, so sort of a less impactful flow-through to EBITDA. But the dynamic really that we see on the adjusted EBITDA side is in the back half of the year, you have a higher revenue and gross margin profile flowing across a sort of flat OpEx profile. And so you see more throughput to EBITDA, but then also the gross margin profile itself is a step higher in the back half of the year than the first half of the year based upon lapping that database work and also sort of delivering on that work slightly better than sort of our original plans had anticipated.

Your next question from the line of Suthan Sukumar with Stifel.

This is speaking Essey speaking on behalf of Suthan. For my first question, I wanted to talk about U.S. growth. It looks like it was down year-over-year. And I was curious if that was a function of a slip deal or some lumpiness there? And what are you seeing in the broader demand environment for the U.S.?

I think the main decline in the U.S. is the U.S. K-12 churn coming out. We're seeing good similar muted demand in higher education in terms of RFP volume, but our win rate continues to tick up and higher education seems to be pretty strong actually in the U.S. So it's really just the U.S. K-12 churn. And then maybe some lightness in our learning services work that's been done traditionally in the U.S. So those are probably the 2 main factors. Overall, the U.S. K-12 EdTech spend is -- has trended down for a couple of years now. I do think that's normalizing. And so the hope is that we will start to see some new logo ads in the near future, both in the U.S. and other K-12 markets around the world.

Long term, I think the trend is a replacement cycle for old legacy platforms that are not really AI-enabled because you can get this maybe it's a 5x improvement or 10x improvement with the technology and the services that we're kind of providing for these clients to support this learning transformation that they're all going through. And so the hope is that, that's already starting to show up in the pipeline, like the pipeline continues to grow quarter-over- quarter-over-quarter. And so we need to do the work now of translating that into a real replacement cycle in the U.S. market.

Got it. Sounds good. For my second question, I want to touch on AI. Good to see the Lumi ARR milestone. I know that Lumi may not be in RFPs yet, but maybe just a question on how AI overall is taking part in pricing discussions. And yes, just how AI has been a factor in that?

We charge an additional amount for Lumi. So far, that price point has not been a barrier for any of the clients that we're engaging with because it comes with this savings. So if, for example, a client is spending $10 million a year on program development, they can now either spend $5 million a year and get the same productivity or that $10 million goes twice as far. And so there's a huge ROI attached to it that dwarfs the investment that's being made. And so pricing has not been a major factor there.

And I think as the adoption continues to tick up, last year, we talked about an 8x increase the year before, an 80x increase in terms of the adoption of like the utilization of that product. I still think that's going to look like the floor of the hockey stick. There's still going to be massive adoption ahead agentic work comes into gear. So I do remain very bullish on this being a high-impact part of our growth story going forward. It just hasn't hit RFPs yet. And with clients, it shows up in a better learning experience. It shows up in better retention. It shows up in things that they care about today and do measure today. So it's an indirect impact, which is why our win rate continues to go up quarter-over-quarter-over-quarter.

Great. And for my last question, I want to talk about just quickly on the international growth. It looks like it decelerated versus the last quarter. I just want to see what the gap was between the ARR growth being 15% in that. And then if I can also tie in just a quick question on just capital priorities post the SIB.

Yes. Thanks. I appreciate the question. Yes. No, there isn't any deceleration in our international growth profile. We continue to view it as a 15% growth business. It's been doing that the past several years and in line to do that this year. I think what you can see from kind of quarter-to-quarter is some sort of imperfect fluctuations, mainly on the professional services side or potentially on the FX side as well. But overall, as John mentioned earlier, we see tremendous opportunity internationally and globally, and we're seeing some really good evidence points even just this past quarter, some really key wins in Asia and in Australia and other parts of the globe.

And then your second question, if you don't mind just repeating it just to make sure I heard correctly.

Just last question on just capital priorities post the SIB.

Yes. So for us, it's really been consistent. So we've always looked at organic investment, buybacks, disciplined M&A. That continues to be the case. Obviously, the past 12 months, we've leaned into buybacks more strongly. In the last 12 months, we've done about 3 million shares or 11% of the opening subordinate voting shares. And we've reinstated our NCIB. We plan to make full use of that for the remainder of this year. But we continue to actively review capital allocation as a management team and as a Board and would expect to continue to do so for the balance of the year.

We have reached the end of the Q&A session. I will now turn the call back to John Baker for closing remarks.

Thank you, operator, and thank you, everyone, for joining us on the call today. We're looking forward to updating you following our Q3 results. Have a great day, everybody.

This concludes today's call. Thank you for attending. You may now disconnect.

Hello and welcome to the Annual Meeting of Shareholders of D2L Inc. Please note that today's meeting is being recorded. If you participate in today's meeting and disclose personal information, you will be deemed to consent to the recording, transfer and use of.

If you disclose personal information of another person in today's meeting, you will be deemed to represent and warrant to Computershare and the company that you first obtain all required consents for the disclosure, recording, transfer and use of such personal information from all appropriate persons before your disclosure. It is now my pleasure to turn today's meeting over to John Baker. Mr. Baker, the floor is yours.

Thank you. Good morning, ladies and gentlemen. Welcome to the Annual Meeting of Shareholders of D2L Inc. I'm John Baker, a Director, Chair of the Board, President and CEO and Founder of the company. This year, the meeting is being held as a virtual meeting. Given the virtual format of today's meeting, we request that shareholders or duly appointed proxy holders who have specific comments or questions on formal items of business, make written submissions now, clearly identifying the applicable item of formal business.

During the course of this meeting, at the appropriate time, such submissions will be brought forward by the meeting's moderator, Craig Armitage, and addressed prior to voting on applicable motions. If you have any questions not specifically relating to any item of formal business to be discussed at today's meeting, please feel free to submit those questions at any time, and we'll do our best to ensure that the questions are addressed following the conclusion of the meeting.

You can submit questions by clicking on the Q&A icon, typing in and submitting your questions. In order to facilitate the respectful and effective Q&A session following the completion of the meeting, only questions of general interest to all shareholders will be answered.

We have 3 matters of formal business to conduct today. First, the presentation of our fiscal year 2026 financial statements; second, the election of directors; and third, the reappointment of the company's auditors for the current fiscal year and authorization for directors of the company to fix the auditor's remuneration.

The meeting is now called to order. In accordance with the company's bylaws, I will preside as Chair of the meeting; and Anna Forgione, Chief Legal Officer of the company, will act as Secretary of this meeting. I hereby appoint Computershare Investor Services, Inc. through its representatives to act as scrutineer for the meeting. I will now ask Anna to report on certain procedural matters. Anna?

The notice calling this meeting, together with the form of proxy, management information circular and annual report containing the financial statements of D2L for the financial year ended January 31, 2026, and the auditor's report thereon have been properly sent to each requisite recipient.

Additional copies of these materials are also available online on the company's SEDAR+ profile at www.sedarplus.com and on our company's website. I will dispense with the reading of the notice of the meeting. The scrutineer has provided me with its preliminary report on attendance at this meeting, and I confirm that the requisite quorum of shareholders is present or represented by proxy.

Given this is a virtual meeting, the voting at today's meeting will be conducted by online ballot for all matters. If as a registered shareholder or duly appointed proxy holder, you have used your control number to log into the meeting and you accepted the terms and conditions, you'll be provided with the opportunity to vote by online ballot.

If you have already voted by proxy and you vote again by ballot during the meeting, your online vote will revoke your previously submitted proxy. If you have already voted by proxy and do not wish to revoke your previously submitted proxy, do not vote again during the online ballot. The polls will be open for all items of business to be voted on at the same time. This will allow you to vote on each item immediately or if you prefer, you may wait until the conclusion of discussion on each item prior to casting your vote.

The items of business to be voted on and your available voting options will be visible on the voting panel on your screen. To submit a vote, please click on the voting choice displayed on your screen. Once discussion has concluded on all items of business, we will provide you -- we will provide a few additional moments for you to enter your votes. Back to you, John.

Thank you, Anna. I now declare that the meeting is duly and properly constituted for the transaction of business. I direct that the confirmation of mailing of the notice of the meeting and the scrutineers' complete report on attendance be annexed to the minutes of the meeting.

I now declare the online voting polls open on all items of business. The first item of business is the presentation of the company's consolidated financial statements for the fiscal year 2026 and the auditor's report thereon. Such materials have been properly sent to each requisite recipient. We will dispense with the reading of the auditor's report.

The next item of business is the election of directors. The number of directors to be elected at this meeting is 6. May I please have management's nominations of candidates for election to the Board?

I nominate each of the persons specified in the management information circular delivered with the notice of meeting being John Baker, Robert Courteau, Tim Connor, Marta DeBellis, Tracy Edkins, David L. Johnston to serve as directors of the company to hold office until the close of the next Annual Meeting of Shareholders or until their successors are duly elected or appointed in accordance with the articles and bylaws of the company.

As the company did not previously receive timely notice of any further nominations of persons for election as directors of the company as required by the advanced notice [ provisions ] of the company's bylaws, I declare the nominations closed. Craig? Can you please advise whether any questions have been received on this matter from the participants of this meeting?

We'll pause for a moment to allow for questions to be submitted. I confirm that we have not received any further questions from shareholders specifically on this item.

Thank you, Craig. We will now conduct the vote by way of online ballot in accordance with the instructions provided earlier.

[Voting]

Okay. The next item of business is the reappointment of the auditors of the company. May I have a motion on this matter?

I move that KPMG LLP be reappointed as auditor of the company until the close of the next Annual Meeting of Shareholders or until a successor is appointed and that the Board of Directors be authorized to fix the auditor's remuneration.

Craig, can you please advise whether any questions have been received on this matter from the participants of this meeting?

Again, I'll pause for a moment to allow for questions to be submitted. I confirm that we have not received any further questions from shareholders specifically on this item, John.

Thank you, Craig. We will now conduct the vote by way of online ballot in accordance with the instructions provided earlier.

[Voting]

Craig, before I close voting on all motions, has there been any questions on any of the motions?

I'll just take a quick pause here and check John. And I confirm that we've not received any further questions from shareholders on the motions. Back to you.

Thank you, Craig. The polls on all items of business will remain open for a few more moments. For those of you who have not yet voted on all of the items of formal business, please do so now. As a reminder, if you have previously submitted a proxy -- completed proxy, you will have voted in respect of the formal business, and it's not necessary to vote again on these ballots.

[Voting]

Okay. I confirm the polls are now closed, and the scrutineer will finalize the tabulation of results and share the final results in due course. Based on the preliminary votes received prior to the meeting, I'm pleased to confirm that the scrutineer has reported to me that all matters put to ballot have been passed with the requisite level of shareholder approval.

As a result, I hereby declare that the nominated directors are elected and the auditors reappointed with the Board of Directors being authorized to fix such auditor's remuneration. I can also report that further to the requirements of the Canada Business Corporations Act, each nominated director received more votes in favor of their election than votes against.

A press release disclosing the director election results will be disseminated and a report disclosing the number of votes cast in favor of, against or withheld from voting for each item of business at this meeting will be reported as part of the report of voting results to be filed on SEDAR+ as soon as possible following the meeting.

As there are no other business that may be properly come before this meeting, I declare the formal portion of the meeting terminated. Thank you. For further information about our business, please refer to our Q1 fiscal 2027 financial results webcast that's posted on our website at ir.d2l.com. We would now like to invite any supplemental questions from shareholders or proxy holders present.

As with the physical meeting, we will observe the same protocols of appropriateness and relevance to the meeting. To the extent we are unable to respond to submitted questions, we will endeavor to follow up with you after this meeting. If you wish to ask a question, please click on the Q&A icon, type in and submit your question.

I'll pause for a moment to allow for questions to be submitted. I confirm that we have not received any further questions from shareholders, John.

Thank you, Craig. On behalf of the Board and management of the company, I would like to thank all of our shareholders as well as others who have joined us today for your support and for your attendance. Thank you.

This concludes the meeting. You may now disconnect.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the D2L Inc. Fiscal 2027 First Quarter Results Conference Call. [Operator Instructions] This morning's call is being recorded on June 10, 2026, at 8:30 a.m. Eastern Time.

I would now like to turn the call over to Craig Armitage, Investor Relations. Please go ahead.

Thank you and good morning. 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 a 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 company's annual interim management's discussion and analysis and the most recently filed annual information form. In each case, as filed under the company's profile on SEDAR+ at www.sedarplus.com.

In addition, during this call, reference will be made to various non-IFRS financial measures, including adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross profit margin, and free cash flow. 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 quarter ended April 30, 2026, and year ended January 31, 2026, 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.

I'd now like to turn the call over to John Baker, Chief Executive Officer, D2L. Please go ahead, John.

Thank you, Craig, and thank you everyone, for joining us for our Q1 earnings call. We released our financial results after market closed yesterday, and you can find those materials on the Investor Relations section of our website. Please note that the results we're discussing today are in U.S. dollars. I'm joined this morning by Josh Huff, our CFO, and we look forward to taking you through the results and answering your questions.

The first quarter of fiscal 2027 represented a strong start to the year, with good execution across our core growth markets. Subscription and support revenue grew 10% to $52.7 million. ARR increased 9% to $225.2 million. We generated $8.3 million of adjusted EBITDA, and our financial position remains very healthy, with close to $100 million in cash and no debt at quarter end. Importantly, we're executing very well across our largest growth markets, higher education, corporate and international. ARR from these markets increased approximately 13% year-over-year, and we saw ongoing strength in both new customer bookings and pipeline generation, which supports our growth expectations for the year ahead.

In North America higher education, it was a good quarter for new customer activity. Our competitive positioning continues to strengthen, which is translating into consistently high win rates, high renewal rates, and pipeline growth. This past quarter, we once again displaced all three of our main competitors.

Notable new customers included Humber Polytechnic, one of Canada's largest polytechnic institutions focused on career oriented and applied learning to over 86,000 students. Loyola University Chicago, a premier private research university with nationally recognized academic programs. Midwestern University, a leader in medical education, has been training the next generation of health care professionals for more than 125 years. Wiley University, which has been expanding access to more inclusive and high quality educational opportunities for more than 150 years. And StraighterLine, a leading provider of affordable online general education courses that support college pathways.

In K-12, we saw a number of new logos, strong renewals, and healthy pipelines. And in corporate learning, we continue to expand our footprint across professional associations and employee learning, including the Royal Conservatory of Music, a globally recognized leader in music education and certification, the American Traffic Safety Services Association, a prominent industry body that represents close to 12,000 professionals, and the world's leading professional body for plastic surgeons.

Our international growth strategy is an important driver of our performance, and we're encouraged by our win rates and strong demand signals across key markets globally. Many institutions are advancing their digital transformation vision, which includes modernizing their learning platform. This shift away from legacy systems is creating significant long-term opportunity for D2L, and we're capitalizing on this, growing international ARR at 15-plus percent annually. Recent customer additions included one of the largest private education groups in Mexico, a growing education organization in the Middle East focused on delivering modern digital first learning experiences, and a leading trade and investment agency in the Asia-Pacific region.

We continue to see both new and renewing customers commit to longer-term agreements, consistent with the historic trend of 5-year contracts in education and 3-year contracts in corporate. One Canadian higher education customer recently renewed with D2L for 12 years after conducting a deep analysis of the learning platform market. This speaks to the durability of the Brightspace platform within our customers' environments, their confidence in our AI roadmap, and their trust in D2L as a long-term strategic partner.

Recently, I had the opportunity to spend time in Europe, Asia and Australia, meeting with customers and partners. And it's very clear that many of these institutions are operating at the leading edge of where learning is going, particularly how they're approaching digital transformation and the application of AI. That perspective reinforces our confidence in the direction of our platform and our strategy. We continue to see increased alignment globally around the need for more intelligent, personalized, and efficient learning experiences.

And as a result, we're experiencing growing adoption of our AI capability, including D2L Lumi, supporting both new customer wins and deeper engagement with existing customers. D2L Lumi is attached to an over 40% of new customer agreements in higher education and ARR growth continues to accelerate. This success reflects the growing body of evidence that D2L Lumi is significantly enhancing learning outcomes and improving operational efficiency for our customers.

With each new success story, we're building meaningful momentum and strengthening our leadership position in AI. This AI leadership is something that we're excited to showcase more fully at our upcoming user conference, D2L Fusion, which will take place in July in Phoenix. We look forward to leaders from around the world to explore the future of learning together from AI and innovation to learner engagement and human connection. I look forward to connecting with many of our investment community contacts there as well.

As we scale AI capabilities across our platform and customer base, we believe there's a growing opportunity to drive greater efficiency within our own operations. We're beginning to realize early productivity gains and expect this operational leverage will become increasingly visible as these improvements take hold, supporting margin expansion and increasing profitability in the years ahead.

Now, before I hand it over to Josh, I also want to briefly touch on capital allocation. We've been more active on our NCIB program in recent quarters, reflecting our confidence in the business. In addition, we announced a $20 million Canadian substantial issuer bid, which we view as an attractive opportunity to repurchase shares at current valuation levels, while maintaining flexibility to invest in growth opportunities at this important time in our market.

I would also like to acknowledge and thank Ian Giffen for his leadership and meaningful contributions during his tenure as lead director. We're grateful for his thoughtful guidance, strong governance, leadership, and commitment to D2L's long-term success. As Ian steps down after 10 years following this week's annual general meeting, I look forward to working closely with Bob Courteau, as he assumes the role of lead director and continues to contribute his experience and perspective to D2L's growth.

With that, I'll turn the call over to Josh to walk through the financial results and outlook in more detail.

Thanks, John, and good morning, everyone. As John noted, we had a solid first quarter, highlighted by healthy bookings and continued strength in pipeline generation. Total revenue increased 8% in Q1 to $57.1 million, led by a 10% increase in subscription and support revenue to $52.7 million, driven by new customer growth and expansion from existing customers. This was partially moderated by previously disclosed churn within the U.S. K-12 market. Annual recurring revenue increased 9% to $225.2 million. Excluding the K-12 market, ARR increased approximately 13.2% year-over-year and constant currency, ARR grew approximately 11.4%.

Turning to margins and profitability, adjusted gross profit increased 7% to $40.4 million, and adjusted gross margin was 70.7%, compared with 71.3% in the prior year period. As we discussed previously, margins in the quarter continued to reflect the impact of the database technology migration, which did not affect the comparable period last year. This margin impact is expected to materially conclude by the end of the second quarter of fiscal '27. Adjusted EBITDA for Q1 was $8.3 million or an adjusted EBITDA margin of 14.5% compared with $9.3 million or 17.6% in the prior year period. And net income for the quarter was $1.7 million compared with $3.3 million in the same period last year.

In terms of cash flow, cash flow used in operating activities were $16.8 million compared with $1.9 million in the same period last year. And free cash flow was negative $16.9 million compared with negative $1.8 million in the prior year period. The year-over-year increase in cash used was primarily attributable to working capital movements, including lower collections following a strong fourth quarter and higher payments to vendors during the period. These impacts are timing related in nature, and we expect year-to-date results at the end of Q2 to represent more normal year-over-year patterning. Cash flow from operations typically have a seasonal low in the first quarter and are expected to improve meaningfully in the second and third quarters, consistent with our billing patterns and historical results in the business.

In terms of capital allocation, we have increased the use of the NCIB as John highlighted. In Q1, we repurchased and canceled about 444,000 subordinate voting shares, and for the trailing 12 months, we repurchased and canceled close to 1.3 million subordinate voting shares, representing 4.2% of the opening SVS shares outstanding. The recently announced SIB is a natural extension of this approach, allowing us to repurchase an even larger number of shares while maintaining a strong balance sheet and investment flexibility.

Looking ahead, we reiterated our guidance for fiscal 2027. As we have said previously, we expect revenue growth and adjusted EBITDA margin to improve as the year progresses with stronger performance in the second half of the year relative to the first half. This progression will position us well for accelerating revenue growth and margin expansion in the fiscal '28 target operating model. We are executing against this plan while continuing to invest in the evolution of the business, both for internal productivity gains and external market leadership, as we continue to see great opportunities in our core markets.

Overall, we are encouraged by the strength we are seeing in our competitive positioning and across our business and remain confident in our ability to deliver on our strategy as the year progresses.

With that, we'll open the call to questions.

[Operator Instructions] Your first question comes from the line of Doug Taylor with [ National Bank ].

I'll start with a question for John. Seeing the slight uptick in ARR velocity in the growth markets here year-over-year, especially excluding the K-12. You referenced the strong pipeline growth as well. Can we dig into that a bit more perhaps to talk about the pipeline velocity and the budgetary picture for those higher education organizations to the extent you can paint that with a single brush?

Thanks very much, Doug. Good to speak with you again this morning. When we're looking at the pipeline, we see now more than a year of consistent building of great pipeline across the organization. We're still not at the stage where we're seeing a really big rebound in the number of RFPs in our core markets yet. But we certainly are seeing that early interest in exploring our products and we were hopeful that at some point we'll see a bigger bounce back in buying activity in that market later this year based upon what we're seeing in that early stage pipeline.

If you look at our announcements this quarter too, what you'll see is very strong indication that we're getting very good at converting clients from all three of our main competitors now. And historically, people would have thought about this as a multi-year journey to switch from one platform to another. And our team is now on average for the last few moving clients in about 5 weeks. We're trying to get to the point where the market recognizes it's no longer 3 years, it's more like a 3 month process. It's no longer a big technology change. It's much more of a smoother transition that's really around change management for students, for faculty, and no longer a big technology integration hurdle.

So we're optimistic that we can build some momentum given all the factors that are playing out in the market right now, and we just haven't seen it yet show up in the numbers. So just want to be clear on that. But we're definitely very optimistic about the year ahead.

And maybe one further question on that. I mean, given the typical seasonality, I mean, for the education organizations school years. I know that is more of a factor in K-12 perhaps than it is in higher education. But how much visibility do you have now into future pipeline conversion or your assumptions around that through the summer here and into the next school year?

Well, I think a key point to underscore is our win rates continually have been showing to be very good and continue to expand. So I'm very confident in our team's ability to take the existing pipeline and convert it to one opportunities. And again from all of our competitors now, not just 1 or 2. And so that bodes well for our ability to continue to put us on track for our plans for next year, as well as for the rest of the remainder of this year, which is why we were confident in reiterating the guidance that we put out.

Q1, as you know, Doug is seasonally a low quarter for bookings. So it's not usually as good as what we probably posted this quarter. And I think it just speaks to our team's focus on execution and really delivering great results. And I think as the team continues to dig in and really strengthen their go-to-market motions, not only in North America, but around the world, again, I think it positions us well to be a very clear leader globally. And we're just focused on the execution right now for the remainder of the year.

Okay, perhaps a question on the K-12. I know it's becoming a smaller part of the overall mix. You referenced the elevated churn there now for a couple quarters. Maybe you can just refresh our understanding on timing of that. What I'm getting at is, how much longer you expect that will remain a year-over-year negative impact, a one time sort of phenomenon versus a more permanent headwind.

So the churn that we spoke about in the past couple of earnings calls comes out of the system for us in Q2. So that's one time. What we're seeing with our core K-12 business is solid. We put up a number of new logos as well in the last quarter, which is very encouraging. And the retention issues with existing clients seems to have been isolated to just those small number of clients that we talked about in the past quarters. So now that will still have a revenue impact, which is in our guidance. But in terms of the impact on our business, that all comes to an end in Q2 from what we can tell.

Yes. That's very helpful. I'll ask one last question probably for Josh. A follow up on your cash flow comments. You mentioned some of the puts and takes here in the typical seasonality. I just want to clarify that what you're saying is there -- the question is. Is there any reason we shouldn't expect free cash flow margins to mimic the 15% EBITDA margin guide over the course of this entire fiscal year, inclusive of Q1?

Yes. Thanks, Doug. There's no reason why free cash flow margin wouldn't mimic adjusted EBITDA margin. To your point, that's historically been true with our business. And Q1 really was just a sort of timing thing on the working capital front. We expect that to iron itself out by end of Q2 where the kind of year to date year-over-year comparison will be more in line with normal trends that we would expect.

Your next question comes from the line of Gavin Fairweather with ATB Cormark.

Your comments on the pipeline and bookings picking up, curious if you could just sort to spare capacity in the sales organization and higher ed if we can extrapolate that trend further, how much more damage the sales team can do, and then maybe also touch on your plans to ramp up the corporate team as your employee training solution progresses.

Well, I think, I'm not sure -- the sound just trailed out at the very end there, but I think I caught the question in terms of capacity for the pipeline conversion. We've got great capacity in our sales organization. They're working incredibly hard. They're largely onboarded group. So, I feel very good about their ability to work the existing pipeline that we've got. That said, we are looking at additional markets globally. We are planning on doing some additional investments in headcount. And so we see this as a good opportunity to make some investments to accelerate growth. I'm not sure if you have [indiscernible] end of your question, though.

Yes, the second piece is just [indiscernible], but they need to add to the -- yes, go ahead.

Yes. We're still seeing very strong performance on the training organization side, so that continues to be a really good growth driver for us as a company. We're starting to see some traction on the employee training side of the business as well, too. But again, that's going to be more of a back half of the year into next story for us on the employee training side. But corporate again remains one of our fastest growing markets in the company. So very excited about what we're doing there.

Appreciate that. And then maybe for Josh, we did see the subscription gross margins tick higher sequentially this quarter, and the language was pretty clear that you expect the database migration to be largely completed in Q2. So maybe you can just help us understand if the impact in Q1 was still at 200 basis points or if it's starting to moderate as the year goes along.

Yes, it's starting to moderate. So I think at its peak in Q3 of last year, it was more significant. We're talking 100 to 150 basis points in Q1 and then it will moderate even further in Q2. And then come back half of the year, we'll be back on sort of our normal cadence of year-over-year comp improvements in the gross margin profile.

Maybe one more for John, I'll squeeze it in here. Can you discuss your view on perceptions of D2L in the market? Obviously, there's been some noise around your competitors recently. As you're going around and chatting with higher education institutions. What's your perceptions on how that has changed?

Well, I think you know in our case we've really driven a strategy building on a foundation of trust, responsible AI and making sure that we're providing our clients a really reliable platform to support their demands all over the world. And I think, especially over the last few months, that's really come to help us a lot in terms of driving our win rate up even higher. I think a lot of our clients really are partnering more closely with us on the innovation agenda. So if you think about higher education today, in particular across all sectors actually, learning is changing in this age of AI.

And so what we are seeing is new demands for things like formative assessments versus summative. I know that's into the weeds a little bit, but really has a big impact in terms of making sure that students are still learning even if they're using some AI tools on the side. And so these are big changes for these institutions to implement. And so leaning into us to not only provide the right technology that can be trusted, provide the innovation to adapt to these new AI models, and then also partner with us to help them build the new programming and take these new models and implement them in all of their courses or programs across their entire institutions. We've become very strategic for many of these clients globally.

Your next question comes from the line of John Shao with TD Cowen.

I understand you have strong win rates and pipeline activities. So I just wanted to shift gear a little bit and ask about customer renewals. So what percentage of your customer base is up for renewal this year, maybe in the next 12 months and any directional guidance regarding how we should think about a contract value at renewals, specifically around student headcount and maybe AI adoption?

So what we're seeing on the renewal side typically in a year we might see like somewhere between a fifth to a third of our base up for renewal, depending on the year, usually not much more -- usually in that range. And so this is a pretty typical year for renewals. Other than the K-12 churn that we've already talked about, we're seeing a good indication that our renewal strength is very strong this year. And then in terms of our utilization of our product for clients, learner seat count continues to be strong. Folks who are adopting our technology in more meaningful ways.

And one example in Singapore, when I was there, there's a big shift in assessment from taking quizzes at the end of the unit to embedded assessments on the page. And what they're saying is our product, if you will, has become essential for them. They want to create hundreds of these in every single course that they're offering, and unless they had our AI technology and our platform, it would have been very hard to impossible to get their faculty to actually do this work. And so we become a critical factor for driving new ways of doing learning. And so I do think that's a good indicator for all of our clients globally to see an increase in adoption of our product.

And if I compare this quarter's press release to the previous one, some of the macro headwind language is no longer there. I'm just curious whether there's been some changes in terms of the macro set up you've seen out there.

I still think there's still some headwinds that are in the market. They just haven't really changed much. If you look at the pressure on our institutions globally, there's still budgetary constraints, there's still transitionary issues with international students in particular, but a lot of our clients are digesting those issues and pulling through it. And so what we're seeing now is some of those clients that were making those adjustments to their own internal practices, budgets, teams are now starting to actually buy. And so that's a good indicator, I think, for the future.

Maybe one last question to Josh. So could you give us some color regarding the Fusion-related cost and maybe the impact on Q2 EBITDA?

Yes, absolutely, John. So in line with historical patterns, Fusion occurs in Q2 and has about a sort of $1.5 million net cost impact. And in line with what we've seen historically, and we would expect something similar this Q2. So it does bring down the EBITDA margin in Q2 relative to the rest of the year.

Your next question comes from the line of Erin Kyle with CIBC.

This is Filip Stevanovic on for Erin Kyle. I'll just ask a question on the international segment. So growth was strong again in Q1, up 17.5% year-over-year, and you mentioned in the prepared remarks ARR growth of 15% plus annually. Can you talk about what you've seen in terms of pipeline activity? And are you seeing higher win rates in these markets? And finally, do you see this growth as sustainable going forward?

Yes. So in international markets we see a much bigger window of opportunity for us to continue to accelerate growth in many different countries around the world. Our win rates in international markets, depending on the market, can be far in excess of what we're seeing even in the U.S. And so, same three competitors are global. We see them all as legacy platforms today, position them as legacy technologies. And for us, it's really about building a great relationship with all of these clients in each of these different markets. And so that's a combination of building great partners as well as a direct force in each country.

I'm really proud of the team. We've invested a lot in the leadership, in the people, a lot of training. And in many of these markets, we're seeing good traction now. Some of them are now getting to the point where we got over 70% market share in some countries like the Netherlands or Singapore. And we're starting to expand it into neighboring countries. We're expanding into other different markets within that same country. And so we're quite excited about the motion that we have in front of us. And again, it's a blue ocean in terms of opportunity because almost everybody is using one of these legacy platforms.

And I'll ask a follow up. I'm just curious in terms of attach rates for add-ons within these markets. Are you seeing that trend higher recently? How should we think about that versus North America, for example?

Yes. Normally, when folks look at this market, they think international, they'll just be buying more of a light version of the technology. That's actually not the case. Most of the clients that we're seeing adoption with are -- they tend to be the leading edge clients in these markets. And they like to buy almost everything that we offer because they're looking for an edge. They may not have had the same sort of the capacity build out that we would have seen in Canada or the U.S. And so they don't have a lot of people to build content or to build courses. And so they're looking for all the tooling, including Lumi, including Creator+ to support their ability to move faster and almost leapfrog, if you will, what they've seen historically in that market, gives them a significant advantage over neighboring universities that have not yet implemented Brightspace.

And I'll just squeeze one more in on capital allocation. So with the $20 million SIB announced, how should we be thinking about capital allocation priorities at this point, specifically in terms of M&A versus internal investment?

Yes, it continues to be a balance. So we've been using the NCIB program more significantly in the last 12 months, and then and the SIB is another vehicle to achieve similar outcomes. And we continue to see M&A as an opportunity to complement our organic momentum and growth. And so from quarter-to-quarter, it's just evaluating opportunities and trying to optimize the capital allocation optionality that we have available to us. And so it continues to be a balance of those two things in this quarter, making more meaningful use of the buyback program and just balancing our options.

Your next question comes from the line of Suthan Sukumar with Stifel.

For my first question, I just wanted to touch on the Canvas security breach. What are you hearing from customers and prospects around that? Just wondering if you're seeing more of a digestion period for the industry and customers start to play out here as they rethink vendors and security requirements? Or are you seeing that drive a more immediate sense of urgency and motivation to move and make changes?

Yes. Great question, Suthan. Similar to the Blackboard situation these events tend to take time to play out over multiple years. And in our case, we've been winning at a high win rate against all of our competitors. Again, the pipeline is strong and growing. I think ultimately this puts us in a much stronger competitive position. As you know, we've invested heavily over the last 25 years in a very strong security and trust and responsible AI posture. We believe that's the foundation for how we should be building our technology. We'll continue to stay vigilant on the security side. We're making additional investments to expand our competitive strengths here, but we certainly see it as an opportunity to continue to take away business from these legacy platforms that maybe have not invested as much as we have.

Got you. For my second question, I just want to touch on Lumi and more so the broader upsell motion that you have with Creator+ and Achievement+ and so forth. So, on Lumi, I believe you guys mentioned that you are seeing a 40% plus attach rate sustained here, which I think is great, especially when considering that I believe AI still has yet to show up more meaningfully in client requirements as part of RFI's, RFPs currently.

But as you think about the near to midterm here, what -- how are clients making decisions around AI today? Because it feels like the backdrop's gone a little bit more noisier with all the AI labs starting to push harder into the education environment. How are you guys [ completely ] position here? And how do you think attach rates trend from here as institutions get smarter on the AI requirements?

Well, I think, Suthan, you're hitting it right on the head. For us, this is the most important thing for us to work on this year is driving attach rate for AI within our client base. And so we're seeing Lumi scale nicely. As we mentioned at the last update, at the end of the year, last year, we had $3.5 million in ARR. That's continued to accelerate in terms of growth. We're seeing now north of 40% attach rate with new higher education customers. We expect that to continue to expand.

We also saw some nice large upsells to existing customers. I think we're at the very early stages of a pretty massive adoption curve. If I look at our clients, they're still doing the homework, if you will, putting in place policies, putting in place strategies for how to leverage this, but there was a very important article that came out in one of the journals, really analyzing the impact of AI in higher education. I think it's compelling for us. They looked at just simply using AI as a student, and students cognitively offloading if they're just simply using ChatGPT, or one of these other models on the side of the system, that's actually having a negative impact on the quality of the educational experience from the students.

Whereas if you look at the Lumi model, we're embedding AI into the learning platform, scaffolding it, changing how we do assessment, changing how we do learning, changing how we do tutoring. The study actually shows a very big positive impact on the quality of the educational outcomes for students. And so I think our clients were waiting for some of this research to happen so they can actually choose. Like, do you pick just simply an open model just to use it generically or to use one that's embedded in the learning platform. And I think it's very clear the research is now showing the Lumi model is the right way forward because it has a positive impact on learning.

And I think education is a little different than other markets. We're not looking to offload all work to an AI. We want students to actually still learn. And so we want to scaffold these AIs into the learning platform to have a bigger impact. So we're still running a bunch of efficacy studies that are showing really positive results from this strategy. But for clients still at that early experimental stage, but in the last 3 years, I can't think of any institution that I've talked to that doesn't care about it. So it's -- I think this will translate this year. We just need to work hard on driving that demand cycle.

Okay. And just one last one for me guys. Just on the international front. It sounds like this still remains very much so a strategic growth area. I know you guys have made substantial investments in this opportunity by way of your go-to-market strategy, but just given all the changes and shifts in the industry with -- between Canvas and AI, do you guys anticipate sort of refining how you guys are attacking this opportunity here? And how might that translate by way of increased growth investments globally?

So we -- I think we see a tremendous opportunity internationally. So what are we doing differently this year? We're opening up new markets is the primary motion. So going deeper in existing ones, and that seems to be playing out well with our increasing market share gains and all of our markets that we're competing heavily in.

And what's interesting is these new markets that we're going into, in some cases, we're actually having to -- for example, we're doing a roundtable this week and in one country, we had to literally change venues 3 times because of the demand. The registrations from prospects in an event just kept going and going and going. And so I think we're at an interesting spot where many of these countries are waking up to the idea of, hey, if a real investment into learning is important right now in this new era, and we're well positioned to win that market.

We have reached the end of the Q&A session. I will now turn the call back to John Baker for closing remarks.

Thank you, everyone, for joining us for today's call. We're hoping to see some of you at our users conference in July in Phoenix, and I look forward to updating you again after Q2 results. Have a great day everybody.

This concludes today's call. Thank you for attending. You may now disconnect.

Hello, everyone, and thank you for joining the D2L Inc. Q4 2026 Financial Results Call. My name is Lucy, and I'll be coordinating your call today. [Operator Instructions]

It is now my pleasure to hand over to your host, Craig Armitage, to begin. Please go ahead.

Thank you, and good morning, everyone. 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 a 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 company's annual management's discussion and analysis, and the most recently filed annual information form, in each case is filed on the company's profile on SEDAR+ at www.sedarplus.com.

In addition, during the call, reference will be made to various non-IFRS financial measures, including adjusted EBITDA, adjusted EBITDA margin, adjusted gross margin and free cash flow. These non-IFRS financial measures do not have a standardized meaning 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 years ended January 31, 2026 and 2025 for more information about these and 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.

With that, I'll turn the call over to John Baker, Chief Executive Officer of D2L. Please go ahead, John.

Thank you, Craig, and thank you, everyone, for joining us for our Q4 earnings call. We released financial results after the markets closed yesterday, which you can find on the Investor Relations section of our website at d2l.com. Please note that the results we're discussing today are in U.S. dollars. I'm joined this morning by Josh Huff, our CFO, and we look forward to taking you through the results today and addressing any questions.

Last year, fiscal 2026 was a strong year of execution and progress for D2L across our growth markets. We delivered 10% subscription and support revenue growth, ending the year at $198.4 million, increased ARR to roughly $220 million, generated $44.4 million of free cash flow, and we strengthened our balance sheet with $119 million in cash and no debt.

Last year, our platform supported more than 21 million users globally across our customer base of more than 1,500 organizations in over 40 countries. At the same time, the year was not without challenges. Namely, we experienced higher churn in our U.S. K-12 customer base. While K-12 is the smallest of our 3 main markets, this dynamic is weighing on near-term revenue growth. For context, K-12 represents 10% of our ARR at year-end and roughly half of that is in the U.S.

To give investors a better view of the underlying performance in our core growth markets, higher education, corporate and international, we've included KPIs that exclude K-12 for some of our data points this quarterly update.

Demand across these markets remain strong. ARR grew by 14% and almost 11% in constant currency. Our sales and marketing teams demonstrated another strong quarter of execution in a year that had lower-than-normal deal volumes in North America Higher Education. That said, we're seeing good demand signals across our core growth markets, pipeline generation exceeded expectations last year and remains healthy entering this new fiscal year, reinforcing our confidence in our future growth.

Turning to the Q4 operating highlights. It was a solid quarter for new bookings and customer additions. In North America Higher Education, we saw a gradual improvement in market conditions with a modest uptick in full campus RFPs and an increased interest in continuing education and adult learning applications for upskilling. We believe our competitive position is stronger than ever and that's reflected in win rates consistently above 50%.

This past quarter, we won business from all 3 of our main competitors with new customers that included Henry Ford College, a large community college in Michigan with a strong focus on workforce development. The University of Colorado: Colorado Springs, a public research university known for engineering, health sciences and expanding digital programs. And Okanagan College, British Columbia's largest regional post-secondary institutions, which serves over 20,000 learners.

In K-12, we continue to provide great service to the largest school districts in North America. And in Q4, we added Hudson Global Scholars, a K-12 organization delivering U.S. curriculum and diploma programs to K-12 students globally.

Internationally, we entered the new year with good momentum. Year-over-year, international ARR growth exceeded 15% in fiscal 2026, and we're seeing strong pipeline as we look ahead. Recent new customer wins include the University of Free State in South Africa, one of the largest public universities serving 37,000 students through a significant online learning presence. The University of Prince Mugrin in Saudi Arabia, a private institution focused on English language education. Whitecliffe College in New Zealand, a leading creative arts and design institution. And building on our market leadership in Singapore, we also added Singapore University of Social Sciences, which specializes in lifelong learning for working adults. After my recent trip to Singapore, it's clear our clients in that region are on the leading edge when it comes to adopting new AIs for this new era.

In corporate learning, we're also expanding our customer portfolio to include a large statewide public health agency serving millions of residents. This win reflects the strength of our platform in supporting large, highly regulated organizations with complex needs. And we added the American Society of Interior Designers, which represents more than 25,000 professionals and educators nationwide.

In addition to these new customers, we continue to win third-party recognition for D2L's product leadership. During the quarter, D2L Brightspace is recognized as the Top Learning Management System by Trading Industry and one of the Best Enterprise Learning Management Systems by Talented Learning. We also received multiple Brandon Hall Group awards for both D2L Brightspace and D2L Lumi. We appreciate the efforts of the D2Lers, who have partnered with our clients so closely to build amazing learning experiences that helped us win these awards.

Now before I talk about the latest AI milestones, I want to frame this through the lens of D2L's long-term vision. For more than 25 years, we've been unified in our mission to transform the way the world learns, and we've done that through multiple technology shifts, the move to mobile, then to cloud, and we've learned to stay focused on what matters the most to educators and learners. Over this period, we've had the vision to deliver personalized learning at scale, and we see AI as a powerful enabler of the work that we're doing with our clients. We're implementing AI in the way that our customers have asked for within the core learning platform that always sits at the center of teaching and learning. D2L Brightspace is a system of record and a system of engagement for more than 21 million users, many use it for hours each day.

And because our customers operate in a regulated mission-critical environment, we've built a foundation of responsible AI, giving them a trusted platform that is built to operate safely and reliably at scale. And we're in the center of a broader ecosystem that supports thousands of third-party products. In 2025, for example, there were 2.1 billion integration links from our platform into partner sites.

With this as a foundation, our AI strategy is focused on embedding AI into the core workflows educators and learners use every day to improve outcomes while at the same time, delivering better efficiency. This past year, we've had a 4x expansion of AI capabilities across more workflows for educators supporting new languages and into new experiences for learners, such as tutoring, feedback and just-in-time interventions.

We continue to see strong interest from customers for D2L Lumi. ARR was more than $3.5 million at the year-end, up from roughly $2 million at the end of Q3. And the attach rate is accelerating, reaching over 40% now for new higher education customers. Importantly, our position as an AI-first next-generation platform is resonating in our markets. It's helping us win new customers and secure renewals, supporting both a high retention rate and increasing win rate. And it's against this backdrop that we see an opportunity to accelerate our market share gains globally, and we're investing to capitalize on this momentum.

In addition to customer-facing applications, we're increasingly developing AI through all aspects of the company on a foundation of responsible adoption. We have extended AI into internal workflows across engineering, go-to-market, customer support and customer success. And we're already seeing a positive impact among all of our teams. For example, our Learning Services group cut the cost of converting old Word documents into engaging, highly interactive learning by over 80%. What took days is now taking minutes, and it has a big impact on the quality of learning for students.

These innovations are focused on supporting higher revenue per employee over time while improving customer outcomes. This operational leverage will become more visible as these improvements continue to scale, supporting margin expansion and increasing profitability in future years.

With that, I'll turn the call over to Josh to walk through our financial results and our outlook in more detail. Over to you, Josh.

Thanks, John, and good morning. As John noted, we had a solid fourth quarter, highlighted by healthy bookings and continued strength in pipeline generation, which in part was offset by churn within our U.S. K-12 customer base.

Total revenue increased 5% in Q4 to $55.8 million and 6% for the full year to $217.5 million. Subscription and support revenue increased 9% in Q4 to $51.1 million, driven by new customer growth and expansion from existing customers and was partially offset by U.S. K-12 churn. For the fiscal year, subscription and support revenue increased 10% to $198.4 million.

Annual recurring revenue grew by 10% to $219.8 million and 7% on a constant currency basis. We saw continued strength in new ARR bookings from our global higher education and corporate markets. Q4 ARR growth was approximately 11% in these markets combined on a constant currency basis. Q4 professional services and other revenue decreased 27% to $4.7 million in part due to a $0.9 million onetime revenue adjustment in the prior year and a generally cautious spending environment in the U.S. market.

Turning to margins. This is an area where we've made significant progress over the past several years. And in fiscal '26, we expanded margins while absorbing additional costs related to the database technology migration. In the second half of the year, this database technology migration had an approximately 200 basis point impact on adjusted gross margin. We expect the impact to scale down over the course of fiscal '27 as the work is completed, putting us back on the path to gross margin expansion in fiscal '28 and beyond.

Adjusted gross margin for Q4 was 68.7% compared to 69.6% and in the prior year period, and subscription and support gross margin was 71.9% versus 73.2% last year. For the full year, adjusted gross margin expanded 60 basis points to 69.6% and subscription and support gross margin improved 50 basis points to 73.3%.

In terms of earnings and cash flow in the quarter, adjusted EBITDA in Q4 was $8.1 million compared to $9.4 million in the prior year period, primarily reflecting the year-over-year comparison in professional services and the database migration costs. For the full year, adjusted EBITDA increased 17% to $32.9 million with an adjusted EBITDA margin of 15.1% for the full year.

Free cash flow was $12.2 million in the quarter, up from negative $0.6 million in the same period last year, reflecting strong working capital management in the current period. And for the fiscal year, we are pleased to report free cash flow grew 63% to $44.4 million as the company continues to scale its profitability and optimize working capital management.

Below the line, our Q4 net loss was $1.4 million versus prior year net income of $19.9 million, with the change being explained primarily by a $15.8 million nonrecurring income tax recovery in the prior year and a noncash fair value adjustment of $4.3 million on the loan receivable from SkillsWave Corporation. For the full year, income was $9 million.

Lastly, our financial position remained very strong at fiscal year-end with no debt and $119.2 million in cash and cash equivalents on our balance sheet. In terms of uses of cash, in Q4, we repurchased and canceled approximately 350,000 Subordinate Voting Shares under our NCIB program, bringing the total for the fiscal year to nearly 1 million shares as of January 31, '26, for an aggregate price of $11 million, representing the cancellation of 3.6% of the opening Subordinate Voting Shares outstanding and roughly doubling the utilization of the NCIB this year.

We continue to put great focus and effort into growing our annual recurring revenue balances, both from new customer acquisitions as evidenced by some of the examples John provided as well as our ability to grow and retain our existing customers. Growth in ARR is a strong indicator of future growth in revenue and future margin expansion through operating scale.

In the current year, our overall ARR growth and related metrics were impacted by our U.S. K-12 market. Excluding this market, our ARR grew 11% year-over-year on a constant currency basis or 14% on a reported basis, and our GRR was 94.4%, and net revenue retention was 103.7%, metrics that collectively give us confidence in our ability to invest into our growth drivers and deliver corresponding strong returns and outcomes.

Looking forward, for the current fiscal year, we are guiding to subscription and support revenue of $212 million to $214 million or growth of 7% to 8%. Total revenue of $231 million to $234 million or growth of 6% to 8% and adjusted EBITDA of $33 million to $35 million, implying an adjusted EBITDA margin of 15% at the midpoint. We expect revenue growth and adjusted EBITDA margin to increase as fiscal 2027 progresses, enabling performance to improve in the second half of the year relative to the first half of the year.

While we continue to make operating efficiency improvements, the overall operating margin guidance for fiscal '27 is affected in part by the flow-through of the U.S. K-12 churn, at a time when we are seeing strong investment returns, in our core growth markets of global higher education and corporate. In fiscal '27, we are carefully balancing near-term operating efficiency with appropriate investment levels to most effectively meet our medium-term objectives and position the company for our long-term goal of market leadership.

Furthermore, in addition to the fiscal '27 guidance, we reiterated our medium-term target operating model of 10% to 15% revenue growth and 18% to 20% adjusted EBITDA margin by fiscal '28. We recognize that our fiscal '27 outlook remains below these targets, reflecting the impact of near-term headwinds we discussed today.

From a revenue perspective, our confidence in accelerating growth is rooted in several factors: one, our strong ARR growth and new customer acquisition in our core growth markets as evidenced by 11% year-over-year constant currency ARR growth in our global higher ed plus corporate markets; two, a gradual improvement in overall global higher education activity levels where D2L operates with very high competitive win rates; and lastly, progress in customer expansion, including upsell of add-on solutions developed organically or added inorganically.

From an adjusted EBITDA perspective, we have high visibility into margin expansion, driven by increases in gross margin as technology migration costs moderate and operating leverage as revenue grows, supported by scale and productivity gains across the organization. We are excited about the progress we are making as a business and confident in our path forward as we work towards our goal of becoming the market leader for learning globally.

With that, we will open the call to questions. Operator?

[Operator Instructions] The first question today comes from Erin Kyle of CIBC.

I just want to start with the ARR growth. You noted 14% ARR growth ex K-12 or almost 11% in constant currency. So you called out a healthier pipeline, a slight uptick in RFP activity. I just want to know where you think -- how sustainable you think that growth rate is exiting Q4? And maybe what's embedded in the fiscal 2027 guidance, excluding K-12?

Yes. Thanks, Erin. Good question. We're pleased with the progress in Q4, as we highlighted, specifically within global higher ed and corporate, we continue to see strong bookings, and as we look forward, we expect that to continue. If you look back over the past 2 to 3 years, we've sort of been operating within that range. And we expect to continue to be in that kind of low double-digit range as we look forward in F '27. We still have some of the offset coming from the U.S. K-12 market as we disclosed. But as we look forward, that core growth rate that effectively is on 90% of our ARR, we're confident in continuing into the future.

That's helpful. And maybe I'll switch gears just to the net cash balance. You ended the year with close to $120 million in cash, no debt. So how should we think about buyback pace in fiscal 2027 versus pace of reinvestment and possibly potential M&A from here?

Yes, good question. Again, we were pleased with the free cash flow generation in the quarter as well as the year now exceeding $40 million on a full year basis. And that's equating to a strong balance sheet, as you mentioned, which is giving us flexibility from a capital allocation perspective. We continue -- as we look over the near and medium term and long term, we see a mix of growing the business through M&A as a way of complementing the organic growth.

But we also see a very attractive price point from a buyback perspective. We've been using the NCIB more significantly in the past year, we more than doubled the usage of the NCIB. We're increasing the level of usage and the capacity here in F '27. And we also recognize that there are additional ways to buy back stock, and we actively evaluate that as well.

Maybe I'll just squeeze a quick follow-up on that one. On M&A, if that is something you're considering, maybe you can just give us some color on maybe what type of targets you'd be looking at? Would it be more tuck-in acquisitions or something more substantial and kind of geared towards the corporate market, and growing that opportunity or more in the higher education space?

That's a great question Erin. I think we continue to evaluate a number of different opportunities in that space. As you can imagine, for us, it's really important to bring in companies that can really help us solve really important problems for our clients. A good example would be the H5P acquisition that we did a couple of years ago now that enabled us to really open up not only higher education as a market, but really plays well in our corporate marketplace as well.

So things that have a natural halo effect across all of our key growth markets is ideal, something that's driving an accelerated growth, helping us expand our gross margin, helping us contribute to EBITDA. These are ideal candidates for us to tuck into D2L. And we're looking at a broader M&A set, as you can imagine, in the year ahead.

The next question comes from Gavin Fairweather of ATB Cormark.

In your prepared remarks, you talked about displacing all of your major competitors this quarter. I'm curious, what the key deciding factor was on the Canvas takeaway.

I think when you look at the factors for all 3 takeaways really from all of our 3 main competitors, it's fairly consistent. It's having a very clear road map for the future in terms of where the technology is going. It's providing exceptional support to the customer to help them through the transition, and having the capability that's going to be needed for the next generation of learning. Many of these clients are trying to also support at this stage, many modalities of learning, on-campus, online, staff upskilling, supporting the workforce market, in the core education market that we're serving today, being able to support all of those at once with one common platform is a compelling differentiator.

And then there's a number of others, too, Gavin. We're still seeing pretty consistently our win rate tick up well above 50% in higher education. And I think the thing that's really standing out for a lot of our clients is the innovation that we're putting into the platform. AI is also helping. It's not showing up in RFPs yet, but it's certainly contributing as the UX in our platform, leveraging AI is just so much easier to create quizzes, create content, create interactive learning experiences, take old courses that might be using Word documents or PowerPoints or PDFs and turn them into a really engaging modern web experiences for students to really drive better outcomes that deliver better retention, better learning experiences.

So I feel like we're winning on all fronts, to be honest, Gavin. I think the work that we have ahead of us is really trying to drive that replacement cycle for all 3 of these competitors, position all of them as legacy technology and help our clients really recognize that we are the leader when it comes to AI and this next wave of learning, and it's built on a strong foundation of responsible AI, leadership on learning science and really delivering an amazing learning experience for students.

Appreciate that. Very helpful. And in your prepared remarks, you also talked about leaning in on sales. Maybe you can just talk about which regions or business lines are getting further investments and what you're seeing in kind of the demand and competitive environment that's telling you to lean in now?

Well, the leading indicator for us is really pipeline. And over the course of the last year, we've seen pipeline continue to perform incredibly well, exceeding our expectations for the full year, also trending well even into the new year here. And so we are definitely seeing good momentum on that front. Our win rate continues to tick up in our core markets. So we're excited about that actually across all of our markets. So we think there's a real opportunity to lean in now to both education and into corporate. And so both key growth markets are actually getting investment at this stage.

Just lastly for me, just on K-12. Can you just touch on the renewal book for fiscal '27? And kind of how much of that 10% of ARR is kind of up for renewal this year?

Yes. Well, maybe I'll split this with Josh. What's interesting with K-12 is you've got a sort of a story of 2 markets. K-12 U.S. has seen some challenges with retention, and we'll get into that in a second. That's about 5% of our ARR. That said, we still have some great U.S. clients. We're actually growing it. Hudson Global Scholars is a great example of a real thought leader in the space adopting us as a platform. And what's also interesting is the pipeline continues to build. So we feel confident on the rest of K-12 outside of the U.S. Those clients are engaging really well, adopting more, leveraging the platform in bigger ways.

And so while it represents now 10% of our business, it's not the fastest-growing part of our business, it still feels very solid as a book of business. And I think long term, will be a market that we want to see bounce back from where it is today.

Josh, I don't know if you want to get into the specifics.

Yes. No, that was a good answer. Good color. As John mentioned, from a renewal perspective, like given it is now roughly 10% of ARR, we typically see about 1/3 of the base be up for renewal in a year, and we see a similar dynamic this year. And as we progress through F '27, we'll start to see the impact of the pressure we've articulated start to moderate, and that's part of what gives us confidence effectively in F '28, is as we get into F '28, the core growth rate from our markets starts to effectively represent itself in our consolidated results in a more pronounced way.

Congrats on the strong bookings.

Thank you. There's been a lot of hard work by the team, so I appreciate it.

The next question comes from John Shao of TD Cowen.

So some of the customers talked to last year were actually a bit cautious towards AI. So right now, do you think you're spending enough time educating the market, so they're getting incrementally more comfortable with AI?

Yes. I think our client base certainly is getting more comfortable with AI. And the leading indicator for us is going to be the change in RFP activity that specifically called out AI functionality, which we've not yet seen pick up. Just want to be clear on that. We're seeing the occasional mention, but it's not consistent.

That said, as we pointed in the call, 40% attach rate for new clients adopting our AI capability out of the gate, Lumi, which is impressive. Typically, when people are doing an RFP, they're just looking for the base product. And so now it's being attached of Lumi, Creator, all these other different add-ons continuing to grow speaks to how important this technology is to transform the experience for our clients.

I also pointed out on an earlier call that we saw about an 80x increase in the adoption. So those clients have adopted. We saw about an 80x increase year-over-year with the utilization of our AI in the platform. We haven't seen 80x this year, but it's up closer to 8x increase in adoption for those that have adopted the platform again this year. So it's -- we're seeing some really good momentum within the adoption for clients. And I think as we continue to roll out more and more capability, I think you'll see that confidence continue to grow.

And I think it's all rooted in the impact that we're having. And so if through these technologies, it makes it tenfold easier or even twice as easy to build really high-quality courses and create assessments that really lead to better outcomes for students. I think you'll see more clients needing this technology, not just desiring it.

I think that 40% attach rate is quite impressive. And how should we think about Lumi versus external AI model like ChatGPT? Do you think they're going to coexist this together? Or they're kind of mutually exclusive for your users?

I think you're going to see them coexist. I think OpenAI is really a great consumer app. And I think many users will use that. I think you'll see -- well, in our case, we use over 12 different models inside our platform to support all the different AI applications within Brightspace. And so you're going to see us harnessing these technologies. And then you're going to see us fine-tune models to support personalizing the learning and taking all of the data and the insight that we have around learning science and improving these AI models to provide a better experience on the learning side for our clients.

And then I hope that you'll see us lean into this even more in the year ahead as we try to embrace new ways of thinking about AI. And if you think about it, at the heart of AI is learning. And so I hope that we've become a very significant player in the AI world as we go forward, not just in terms of the technology, but in terms of the human impact in terms of upskilling with our clients to support the transformations in the workplaces, to support preparing students for the next generation of jobs, the changing entry-level roles that people are going to have to find as they look for jobs.

We're at the heart of solving many of these critical problems. And I'm quite excited with the team's motivation and excitement about digging in and getting this all done.

The next question comes from Stephen Machielsen of BMO Capital Markets.

I just want to dig in a bit on the growth algorithm, specifically the new logo adds versus expansions. Do you see that mix changing in your fiscal '27 assumptions? And does that mix need to change going into 2028 and getting back to that 10% to 15% growth?

Well, I think we might actually see a bit more action with our clients this year ahead because I actually do think the adoption of like products like Lumi, Creator+ and others will accelerate quite quickly. And so maybe slightly more with clients and new logos, but I expect a number of new logos to continue to accelerate in the year ahead, just given the pipeline and given the work that our teams are doing.

And then beyond North America, in international markets, the teams are working really well to drive deeper penetration into existing markets and also start to open up new markets, which should see accelerated new logo growth as well, too.

So I'm not saying one or the other is going to be my favorite child, but I really do think both should be firing at a good level this year, which will set up next year in terms of revenue rec really well.

Yes. We've been operating at a roughly 50-50 -- Stephen, just to add a bit of color. Sorry, there's a lag. We've been operating at a roughly 50-50 mix in F '26. We'd expect that to continue over the medium term. If you look back in the history of D2L 2, 3, 4 years ago, it was more of a 2/3, 1/3 new logo orientation. The existing customer upsell motion, as we've talked about for many quarters, is a strategic priority of the business and adding things like H5P, Creator+, Lumi to our portfolio that add incremental value to customers, but also help that upsell commercial motion has been a priority and is showing really good progress.

But to answer your question, it's a 50-50 mix is sort of the way to think about it.

Okay. That's very helpful. Now looking into the fiscal '27 EBITDA guidance, it implies that -- well, it doesn't really imply much in the way of operating leverage. Now I know there's additional expenses related to the database migration. But I'm guessing there's some investment in there as well. I wonder if you could give us a bit more color on where you expect that spend to go, and how much of that additional spend could fall off going into fiscal '28?

Yes. Thanks, Stephen. So a couple of things. As we mentioned, the second half profile does accelerate. So we'll exit the year with a margin profile that's higher than sort of the average full year guide of 15%. Mechanically, there's kind of two near-term headwinds. One is the database migration cost, which moderate as we exit the year, and that's about 100 basis points. And the second is just foreign exchange rates, specifically the strengthening of the Canadian currency, given a majority of our expenses are Canadian, and that has a roughly 100 basis point impact on our margin profile.

And then if I just sort of pan out, as we've been working through strategic planning going into fiscal '27, we did carefully consider the right balance of investment and operating leverage in the near term. And seeing the progress in our core growth markets, as we mentioned, growing 11%, and NRR rate of 104%, and then also seeing good progress with Lumi, we made the decision to, in F '27, make what we feel is appropriate investment into those growth drivers where we're seeing strong return, while also balancing operational improvements that are, in some respect, being offset by those near-term headwinds I mentioned before. So that's sort of the mechanics of the F '27 margin profile.

I maybe just add -- Josh did a good answer there. But just maybe just add a bit more color. The work that we're doing on the gross margin improvement is progressing really well. I've been quite impressed with the team's work there is tracking well as we articulated before, trying to wrap that work up as quickly as we can in the first half of this year, and feel like the team is doing a good job on that front.

And then there is a lot of AI investment, as you can imagine, that's going into both the product, but also in terms of internal adoption. And that should have a pretty big impact on our ability to confidently hit our numbers for next year for EBITDA.

The next question is from Paul Treiber of RBC Capital Markets.

You mentioned that the database migration has been going well. Just can you just dig a little bit deeper on it? And the point of my question is really around like the magnitude of the change that's involved, particularly have you been able to utilize AI to help smooth that transition because we've heard lots of stories of apps being vibe coded in the weekend and things like that. Like the migration has been going for a couple of quarters now. Just could you give us an -- explain the degree of complexity that's been involved in that migration?

I think we're actually through the bulk of it, Paul. This has been many years of us actually working on this transition. And so it's not vibe coded, just for clarity, like we did try to use a whole bunch of different technologies to help make the transitions from one version to another much easier, much faster. But -- this has been some of our best engineers working for many years to support this transition. That work is largely done. It's now a bit more of a pave path for the next quarter or 2. And so there is more work that we could do in the future. And so there are additional gross margin improvements that we can make over the following years.

But what I like is many of our best engineers are going to wrap this work up and get back to some of the other things that are going to really add a lot of value to us as a company. And so yes, no vibe coding at this stage. But hopefully, we'll see more leveraging of AI in other ways.

That's helpful. The second question is a big picture around R&D and with the use of AI internally, can you give us a sense, or what's your sense in terms of like the productivity gains that you've seen with it? And then how do you look at the balance between taking those productivity gains and using it to drive more product innovation versus letting some of that fall to the bottom line?

Yes. I think we're still early stages in terms of our own internal adoption of AI. So the teams that have embraced it, I'll give you a couple of examples, our Learning Services group have cut the cost -- internal cost of developing courses by over 50%. We're even now offering services to our clients to help them understand how they can do similar work using our tooling, using our team to help drive the cost of developing new programs and new courses by upwards of 50%, which is not small. Many of these clients will spend tens of millions on new program design in a year, and so they can do twice as much for the same spend, or they could cut and drive efficiency dramatically for their university or college or for their training organization. Very compelling. So I think that's an opportunity, not just a cost saver.

And then internally, like we did have one of our teams leverage a lot of agentic AI and automation with AI and it managed to take the team as they saw natural attrition, we didn't let people go for clarity. But as we saw natural attrition, the team is now less than half the size it used to be, but it's 3x more productive. And so there are key workflows. There are key applications of AI within D2L that we want to see like that apply to many, many other parts of the organization to really improve the efficiency and automation.

And maybe one last example, I can give you 100 examples, but one last example is where our big effort right now has been trying to take implementation for new clients. So we're removing all these folks from all of our main competitors. In the past, it used to take many, many months to convert a client over to us as a platform. And then recently, we've been saying 3 months, not 3 years. It takes some of our competitors 3 years to move from one system to theirs. In our case, it's now 3 months is our promise.

And we're trying to get it down to 3 weeks. Like now that's an ambitious goal because as you can imagine, changing a big enterprise system like this is not easy. But the combination of people plus agentic plus AI is really going to help us solve a critical bottleneck, which, as you can imagine, if there's a replacement cycle to move to more of a modern AI-first learning platform, which we expect to create momentum around, we want to be able to capture that momentum as fast as possible.

And so we're definitely leaning into this, this year. This is part of the investment that we talked about with Josh and myself earlier, is investing to see the deployment of more of these technologies across the broader organization. I don't think -- I can't think of a team that wouldn't benefit from leveraging these technologies in the future.

The next question comes from Suthan Sukumar from Stifel.

For my first question, I wanted to touch on corporate learning. It's good to see consistent traction here. Can you speak a little bit to some of the progress you've made on revamping your go-to-market process given the recent hires and where you stand on your product investment focus for employee learning use case and how that's tracking? And when do you expect that to start? When do you expect to make a more meaningful push on that front?

So I didn't quite catch that last part of the question there, the second part of the question. But I'm happy to speak to the first part first. But if you can sort of repeat the second part, that would be great.

Sure. Yes. The second part was more around where you stand on from an R&D product perspective for the employee learning use case, and how that's tracking? And when do you expect to see more impact on that front?

Yes. No, those are all great questions. And so we -- as we've mentioned in the previous call, we're really -- if you look at our growth markets, education, higher education specifically, and corporate, in the past, we were very much focused on training organizations, think like professional accountants or nurses or other, interior designers is another one that we announced this week. That's all going well, and we continue to make investments both on the go-to-market and also in terms of R&D to support that push, and those are growing very well, as Josh pointed out.

Employee training is relatively new. We have a lot of clients in that space already that adopted us, but we still think we need to put a little bit more investment from an R&D perspective into that market. The investment that we're making on the sales team underneath Kevin Capitani, and his leadership has been going well. The team is building out. I think I just approved another hire this week. And now it's about driving execution, we're even chatting with some clients later today. So I think that's going to go well this year. But the key now is making sure that the go-to-market motion really fires up and that we support it quickly on the R&D front.

Now keep in mind, all of the R&D that we do for employee training is going to play incredibly well with our other markets because the functionality that we're building to close gaps there in that space are going to be features that are going to be loved by pretty much every other client that we've got. So I feel like it's a very worthwhile investment.

For my second question, I wanted to touch on M&A. In this backdrop, do you see increased opportunity for acquisitions? And in general, how have your priorities changed? I'm kind of curious as to what might be becoming incrementally more exciting for you guys more recently.

Yes. No, it's definitely changed what we're looking at in terms of M&A. I do think M&A is still an important driver for us to accelerate growth and also to support our ambition from a profitability perspective. And I think our team is hungry for additional products, even though we've got a number of them already to be able to take it to our base because our clients have no shortage of challenges, they want us, like a company like ours to help them solve. And so I do think there's capacity for us to continue to push on that lever.

And so in terms of what's different, I think we're thinking about the market differently in this new age of AI. We want to really look at things that are going to really help us strengthen the platform and that are very defensible in this new market. And so in our case, we're also seeing 1,000 applicants for a job. And so it's not about so much the talent, it's really about the combination of a great team, solving really important problems that really strengthen our platform story.

The next question comes from Brian Peterson of Raymond James.

This is Jessica on for Brian. Really good to hear about the positive commentary on pipeline generation coming out of last year. So I'm just thinking in light of that, how should we be considering the current pipeline mix, like a rough high-level view of it between what would be considered more like your early-stage interest or opportunities that are further along in the current procurement evaluation process?

By the way, I think it's Jessica, right? Is that right?

Yes.

Yes. Thanks, Jessica. Sorry, you got introduced as Brian. I wasn't quite sure.

So I think when you look at -- I appreciate it. When you look at our pipeline, we have -- it's basically across the board. We certainly have a lot more early-stage pipeline. But that pipeline is, as you can imagine, the team worked through it pretty aggressively to move it through the conversion stages. Conversions at each of the stages has continued to tick up, like we mentioned with the win rate at the final stage. It's still taking longer to take people through that journey, if you will, maybe slightly less than it was this time last year, but it's still a journey. There's no question, it's still a full court press. The team is working very hard to sort of convert everything.

But what I do like is the pipeline is growing, conversion is growing. The teams really dialed in, in terms of really looking at the data in new ways and better ways. And I feel very good about our ability to go off and win that business that we're generating in terms of interest. So I'd say a gradual improvement, and we will hopefully pick up speed as we get through the year.

And also sort of a follow-up. In the past, international markets have been slower to adopt cloud LMS as compared to the North American market. But as we're having the development in AI, have you even seen the new technologies helping with just expanding the market there internationally and winning deals?

Yes. That's a great question because it's a very much a challenge in international, right? Because you're right. They've been a lot slower to adopt cloud. But I think they've come around. We've announced a bunch of wins there internationally that historically, we wouldn't have seen because they were not ready for cloud in the past, but they are today. And then AI is, I think, a compelling driver internationally. But more importantly, responsible AI. They want to make sure that the partner they're working with are really thinking carefully about how to implement these technologies in the ways that are going to improve the educational outcomes for students and make the jobs of the faculty and the administration that much easier.

And so it's not just AI. It's making sure that we implement it in ways that are really going to have a really positive impact, which is why we're putting so much work into developing efficacy studies and partnering closely. We just announced, for example, 5 different grants with the SUNY System to really look at different nuanced uses of this technology to support the classroom experience. And so it's that combination of these things that are really driving international adoption.

And I think internationally, many of these schools want to leapfrog. They've been using old legacy platforms for a very long time, and they're ready for a change. And when they want the change, these clients tend to want to embrace a lot of different technologies, not just the core learning platform. And so I'm actually quite excited about the international market.

And in some regions, not all, just for clarity, some regions have an abundance of capacity, but other regions where there's not a lot of capacity as and they have not learned how to build a lot of online courses, they're relatively new in. A good example would be India, who has just opened up the market for online. Our ability to go in and not only help them with a great platform, but also help them through the -- how do you actually build a great online program is highly impactful. There's a good case study that we just put out where we took a University from 0 online students to 50,000 just over a handful of years.

And so that kind of growth doesn't happen without a great partner. And so I think our team is well positioned to support these clients globally.

We have no further questions at this time. So I'd like to hand back to John for closing remarks.

Well, thank you, everyone, for joining us for the call today. We're really looking forward to updating you following our Q1 results. Have a great day, everyone, and Happy Easter.

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

Good morning, and thank you for attending the D2L Inc. Q3 2026 Financial Results. My name is Rica, and I'll be your moderator for today. [Operator Instructions] This morning's call is being recorded on December 11, 2025 at 9 a.m. Eastern Time.

I would now like to pass the conference over to your host, Craig Armitage, Investor Relations. Thank you. You may proceed, Craig.

Good morning. 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 a 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 information, please refer to the company's annual and interim management's discussion and analysis and the most recently filed annual information form, in each case as filed under the company's profile on SEDAR+ at www.sedarplus.com.

In addition, during this call, reference will be made to various non-IFRS financial measures, including adjusted EBITDA, adjusted EBITDA margin, adjusted gross margin and free cash flow. These non-IFRS measures do not have a standardized meaning 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 9 months ended October 31, 2025 and 2024 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. With that, I'd now like to turn the call over to John Baker, Chief Executive Officer of D2L. Please go ahead, John.

Thank you, Craig, and thank you, everyone, for joining us for our Q3 earnings call. We released the financial results after markets closed yesterday, which you can find on the Investor Relations section of our website at d2l.com. Please note that the results we're discussing today are in U.S. dollars. I'm joined this morning by Josh Huff, our CFO, and we look forward to taking you through the results today and addressing any questions. Q3 was more challenging than anticipated with growth rates reflecting both lower services revenue and higher churn in our U.S. K-12 market.

That said, we're making good progress across our key growth pillars, including higher education, corporate and international and seeing strong indicators that reinforce our confidence heading into Q4 and for the year ahead. Quickly, looking at a few key financial highlights for Q3. Subscription and support revenue rose 6% to $49.4 million. Annual recurring revenue grew 6% over last year's Q3 to $213.4 million, and adjusted EBITDA was $7.9 million with adjusted EBITDA margin at approximately 15%. For the year-to-date, SaaS revenue was up 10% and adjusted EBITDA increased 33% with a margin of 15%, and we're on track to land within our guidance for the full year on these two measures.

It was also another solid quarter for ARR bookings from our two growth markets, higher education and corporate. We generated ARR of 10% year-over-year in these two markets in an environment where U.S. Higher Education activities remained subdued for the last year. Looking forward, pipeline generation has been better than forecast for multiple consecutive quarters and remains healthy. In North America Higher Education, we're seeing a gradual improvement in market conditions with early signs of increased activity as institutions redirect attention to investments that improve outcomes, find new pathways for growth and strengthen student retention and experiences.

Our competitive position has never been stronger, and we continue to win more than 50% of the time. In Q3, these new customers included the University of Central Arkansas, which selected Brightspace to replace its legacy system and transform the learning experience for more than 10,000 learners. St. Ambrose University, a leading private institution in Iowa with a strong focus on personalized learning and Oregon Health & Science University, a premier academic health center, chose Brightspace to power the learning for the next generation of health professionals.

In the K-12 market, we've experienced higher churn from U.S. customers this year, largely from their internal leadership changes and a reversion to more traditional models of education in that region. Globally, we're seeing healthy K-12 client adoption metrics as many countries, states, provinces and districts look to improve the quality of their educational experience with our learning platform. And for context, K-12 represents roughly 12% of our ARR at the quarter end, and we're intensely focused on continuing to provide great service to some of the largest K-12 school districts in North America and globally.

Internationally, our teams continue to perform well and expand D2L's footprint across targeted countries. Our year-over-year international ARR growth exceeded 15% in Q3, and we're seeing similarly strong pipeline trends. Among the new customers this past quarter, we welcomed the University of West Scotland, one of Scotland's largest modern universities serving approximately 20,000 students. And also in Europe, we added a leading global banking institute, which is advancing skills and standards for thousands of banking professionals. We continue to expand our reach in corporate learning globally. In Q3, new customers included the Florida Center for Nursing, a large statewide center dedicated to strengthening the nursing workforce and supporting health care education initiatives, the Professional Association for dentists in New Zealand and one of the largest nursing unions and professional bodies for converting to Brightspace to power the professional development for its extensive membership.

We're also expanding employee training underneath our SVP, Kevin Capitani, who joined D2L this fall and has quickly made a positive impact both within our go-to-market and product road map. Kevin brings 30 years of leadership in technology and learning, including 20 years at SAP and most recently as President of Pearson North America. I've recently been on a number of global trade missions, and it's clear that employee training and upskilling are big areas of focus for leaders in business and governments. I see this as a significant growth pillar for D2L in the future. Platform expansion and upsell is another growth pillar for the company, and I'm pleased to report that we're seeing a healthy pipeline generation for new products, including our AI offering, Lumi.

Now 5 quarters into our launch, we have more than $2 million in ARR from Lumi, and our pipeline for the product is growing significantly. AI remains front and center for our engagements, both with existing customers and prospects, confirming our view that AI will act as a significant catalyst for a new investment cycle. Our investments into our product are growing customer adoption and expanding use cases that demonstrate improved learning experiences and outcomes. D2L is well positioned to help our clients lead the transformation of learning. And with that, I'll turn the call over to Josh.

Thanks, John, and good morning. The Q3 results were mixed. We had healthy bookings and pipeline generation in our core growth markets, giving us confidence moving forward. This was offset partially by some expected impacts from the year-over-year comparative period and higher churn in U.S. K-12. Total revenue for Q3 was $54.1 million, in line with the same period last year. This was impacted significantly by a year-over-year comparative period that included a $1.2 million professional services revenue true-up adjustment. Subscription and support revenue increased 6% to $49.4 million, reflecting new customer growth and strong expansion from existing customers and was partially offset by the U.S. K-12 market churn.

For the fiscal year-to-date, SaaS revenue grew at 10%. Annual recurring revenue grew by 6% to $213.4 million. We saw continued strength in new ARR bookings from our global higher education and corporate markets. As John highlighted, Q3 ARR growth was 10% in these markets combined. Professional services and other revenue decreased 38% to $4.7 million. This decrease in part reflects the revenue true-up adjustment included in the prior year and a continued cautious spending environment in the U.S. market, resulting in reduced near-term demand for larger engagements such as our curriculum advisory services.

We've made significant progress on gross margins over the past several years. However, the Q3 gross margin decreased mainly because of additional costs for the planned migration of a database technology, which had a roughly 200 basis point impact the course of fiscal 2027 and for this technology change to create incremental margin benefits in fiscal 2028 and beyond. As a result, adjusted gross margin was 67.8% compared to 69.9% in the same period last year. And gross profit margin for subscription and support revenue was 71.1%, down from 72.7% in the prior year. Gross profit margin for professional services was 20.4% in Q3 compared to 45.2% in the comparable period last year, which was impacted by the true-up adjustments.

For the year-to-date period, we continue to demonstrate meaningful operating leverage. Total OpEx increased by 1% over the prior year and OpEx as a percentage of revenue decreased by 320 basis points. In Q3, operating expenses were $32.5 million, consistent with the prior year, and OpEx remained the same as a percentage of revenue at 60%. We view this as a very important period as we work to become #1 in targeted learning markets globally and increasingly establish ourselves as the next-generation learning platform. And we are investing in product innovation and market expansion accordingly.

In terms of earnings and cash flow in the quarter, adjusted EBITDA was $7.9 million compared to $10.4 million in the same period last year. The year-over-year decrease is explained by the prior year professional services true-up and the current period database technology migration. For the year-to-date period, we reported a 33% increase in adjusted EBITDA and adjusted EBITDA margin was just over 15%, consistent with the midpoint of guidance for the full year. Income for the period was $4.4 million versus $5.5 million for the same period in the prior year, and free cash flow was $18.8 million, up from $11.3 million in the same period last year.

And for the fiscal year-to-date, free cash flow grew 15% to $32.2 million. Our financial position remained very strong at quarter end with no debt and $110.5 million in cash and cash equivalents, providing us the flexibility to invest in growth opportunities as we move forward. In terms of uses of cash, we repurchased and canceled 223,500 Subordinate Voting Shares under our NCIB program in the third quarter, bringing the total for the fiscal year-to-date to roughly 600,000 shares as of October 31, 2025. And this week, we announced the launch of a new NCIB with increased capacity commencing December 12.

Our capital allocation continues to support a low dilutive impact. The weighted average diluted shares outstanding increased by less than 1% over the past 12 months. With 1 quarter left to go in the year, we refined our full year guidance. We are now expecting subscription and support revenue in the range of $198 million to $199 million, implying growth of 10% over fiscal 2025. Total revenue in the range of $217 million to $218 million, implying growth of 6% over fiscal 2025 and adjusted EBITDA in the range of $32 million to $33 million, implying an adjusted EBITDA margin of 15%.

In closing, we're executing with discipline while navigating a dynamic market environment. In our core growth markets, we're seeing a better-than-expected pipeline and healthy ARR growth. Combined with a strong global competitive position, a healthy balance sheet and growing cash flow, these trends reinforce our confidence leading into Q4 and the year ahead. With that, we will open the call to questions. Operator?

[Operator Instructions] Your first question comes from Doug Taylor with Canaccord Genuity.

I just want to dig into the churn you're seeing in the K-12 market. Some rough math here, if it's 11% of your ARR suggests the churn is pretty substantial. And so I just want to -- I want to understand a little bit what's happening there with respect to those organizations? Is it them reducing the number of students covered? I don't think there's some competitive displacement, but maybe you could just flesh that out for us a little bit in terms of what's happening in the remaining exposure?

Doug, it's the 1 or 2 key clients that are making a move to a competitive solution. So there is a small element of that. But the rest is largely leadership making a decision to go from supporting full online experience, supporting a hybrid approach where, for example, on a snow day, like they are having in Ontario today, the students would actually be able to switch back to an online experience in a heartbeat to much more of a traditional model of education and reducing the reliance on digital.

So that -- there seems to be a number of schools that have made that pivot back to something that we would have seen probably 15, 20 years ago. And I'm hopeful that over time, we get them back on the right track for supporting this digital expansion with traditional K-12 education, like we're seeing in other jurisdictions and like we're seeing in other jurisdictions through the rest of the world.

So just maybe to put that another way, given the budgetary environment, they're moving to a less feature-rich LMS platform if they have one or -- and then maybe in the competitive situations that you described where they're moving to another platform, is that based purely on pricing?

I'd say in the ones that are making the move to another platform, yes, I think it's largely based upon pricing. And in another case, it's -- I don't think it's budget. I think it's just new leadership with a new vision for where to take the institution and taking it back into more traditional routes versus digital leadership route, routes that have been established for -- and the one case I'm thinking of 10 to 15 years of really pioneering a better learning experience through digital and just going back to a more traditional approach. So it's more of a pullback versus a complete removal of the platform in that particular case.

But I do think as we continue to work with that client in particular, we will see them continue to invest more and more in digital over time. And so I do think while we are seeing some impact in the K-12 sector in the U.S. beyond the U.S., we're actually seeing good strength in that market.

That's an interesting new leadership approach. we've got now your updated guidance for this year, reflecting some of the puts and the takes that you've mentioned, and we've still got this medium-term guidance that's, I guess, about 2 years out now. And I know we'll get guidance for next year in a couple of months. But I just -- maybe I could get you to qualitatively at least talk about how we should map the impacts we're seeing here as it relates to the top line puts and takes and also professional services to the extent you can on to next year's model, I think that would be very helpful?

Yes. I think maybe we'll split this question with myself and Josh. From my vantage point, just traveling the world over the course of the last few months, it's very clear that there's good healthy pipeline demand. International is going well, corporate is going well. Higher education is going very well. And even in some of the global opportunities we're seeing in K-12, we see good growth opportunities. The key for the year ahead is converting that pipeline into good growth. And we've got, at this stage, good confidence in a good quarter ahead and in the year ahead and our progress towards that medium-term model that we've articulated is unchanged, Doug. So feeling very good based upon what we're seeing in the field and based upon what we're seeing with pipeline generation. But Josh, I'll let you take part of this question as well.

Yes, Doug, I appreciate the question and recognize there's a bit of a step from the 6% to the 10% to 15%. As John mentioned, we feel very confident in our competitive position and the investments we're making. And then maybe more specifically, if you just look at sort of the near-term compression we saw from the U.S. K-12 churn in a lower-than-typical higher ed new logo market. And so [ ex K-12, ] we have reported year-over-year ARR growth of 10%, again, in a muted higher ed market. And as we look forward, we remain confident in the ability to grow very effectively in those core markets of international and higher ed, international, higher ed and corporate. And we also see an increasing opportunity within the employee training corporate environment, where we're making very pointed investments from both a product and a go-to-market perspective. So the net of all that, we remain confident in the fiscal '28 operating model and are making the right investments.

Your next question comes from Gavin Fairweather with Cormark.

I appreciate the comments on the pipeline, and I was hoping to dig a little bit deeper. Curious if you have any stats you could share on the pipeline growth or the build versus budget, which sounds like it's been strong or kind of how the shape of the pipeline is looking in terms of top versus bottom of the funnel?

That's a great question. So we've now -- this will be our multiple consecutive quarters of reporting better-than-expected pipeline generation. Just to give you a bit of a ballpark, we're entering into Q4 with probably the healthiest pipeline that we've seen in more than 3 years. And so we're feeling very good about the top of the funnel performance. And as we see it fall through to getting into deals in progress with clients, feeling very good about our ability to execute and win those deals. And so I think that sets us up for a good quarter ahead and a good year ahead as the team is doing a good job on execution there right now.

Appreciate that. And then just maybe on the employee training market. I did see the addition of a new leader there, and you continue to advance your product for those employee training use cases. But how should we be thinking about the build-out of the go-to-market team in fiscal '27 and kind of the time lines to increase deal flow and ARR build in that segment?

Well, I think that's one of the nice things actually is we're actually feeling very good about having the capacity with the sales team. We've done the hiring already for next year, this year to make sure that we're well set up for success with an overcapacity for us to deliver in the year ahead. So that build-out has largely been done. We are going to continue to build out the employee training part of our business. We've done a number of hires there already, but that will continue to grow. We expect that, that will hit in terms of improving our ability to close more and more deals in that space in the early in the new year as those folks come up to productivity. So feeling pretty confident relative to, let's say, 2 or 3 years ago, where we struggled with having the right talent in the right seats at the beginning of the year. This year, we're well ahead of schedule. And I'm optimistic that will help us hit the ground running fast in the new year.

That's great to hear faster than I would have thought. And then just quickly on K-12. When you look at the shape of the renewal book, kind of coming up? Are you thinking that maybe this might be the peak headwind to sequential ARR and we can expect a bit more of a moderated pace of headwinds going forward? How would you characterize that?

We're aware of one other large K-12 school that's planning on making a move next year that's shifting to a competitor. We know that, that shift has not gone well at all. We're trying to do everything we can to support them, get them to be retained, if you will. But other than that, there's no other signs from any of the other K-12 business that we have outside of that U.S. client, and it's not impacting our ability to grow the business next year, both for our core plans for the business or for our medium-term model. And globally, as I said, in K-12, we're actually seeing good opportunity for expansion. So I think there's just a bit of an air pocket in one of our key markets.

We now have Erin Kyle with CIBC.

I wanted to follow up with a question on the K-12 churn as well. You mentioned competition in the space. I think we know there's some other large players that have been in the space for a while. But some of the larger AI players like Google and OpenAI have been rolling out AI offerings for education in the last couple of weeks and months here. So I'm wondering if you've been seeing increased competition or any churn tied to customers looking at those options as well?

The quick answer is no. That's not the competitors that we would be losing to. We're actually harnessing many different AIs to support the growth of our platform. So in other words, taking Cloud or OpenAI or dozens of others to incorporate those into our product as part of our Lumi offering. And so in our market, everyone needs a core learning platform and the key is to harness these AI technologies to make it easier to build questions, build assignments, build learning activities and experiences. So those folks would be more natural partners for us versus direct competitors.

Okay. That's helpful context there. And maybe I'll just switch gears to the higher education space. And maybe if you could just give us an update on the competitive landscape in that space and whether you've noticed any shift in the last several months following Anthology's Chapter 11 filing. Any changes to your win rate there? Anything you can share on that space in particular?

That's a great question, Erin. So obviously, the market has changed a lot in the last quarter with Blackboard filing for bankruptcy and going through that process. What we have seen and can report is that our pipeline continues to grow. Our win rate continues to grow. And I think we're well positioned to be very competitive against all of our competitors in the higher education market. So you've got Blackboard going through bankruptcy and restructuring. That's not going to be easy for their customers. It's not going to be easy for their teams. You've got Instructure now entering multiple years of being owned by private equity, and you've got Moodle going through a leadership change as well as a new ownership.

And so these are all big internal changes that these organizations are grappling with. While we're very much focused on delivering world-class product, world-class service to our customers and helping them deliver outstanding results for their students, helping them grow in new ways, supporting different models of learning. I think we're well positioned to go win in this market.

We now have John Shao with TD Cowen.

Could you give us some color regarding where you see your adjusted EBITDA margin is going to land? Right now, the average is around 15%. So where do you see the upside? Or should we expect a balance point after which we're going to see more investments?

Yes. Thanks for the question, John. The current period, as you can see through our guide, is a 15% adjusted EBITDA margin, which is sort of where we've been the past quarter or so. As we articulated last quarter and you see again this quarter, we are working through that database technology migration. And so that does create a bit of sort of a short-term bubble cost, if you will, relative to what would otherwise be our margin profile. So as we work through that throughout fiscal '27, that impact will moderate. And then we'll get to a point in F '28 where we can start to see incremental margin benefit from that migration of that technology.

And then as we build towards F '28, we will continue to seek opportunities for operating leverage. And so we very much feel confident in the build from today to the 18% to 20% margin profile in our F '28 operating model. I will mention, as we do that, we're obviously looking for efficiency gains such that we can make the right investments. We see this as a very important time for us to establish ourselves as that next-generation platform and continue our sort of momentum in global higher education and really establish ourselves in corporate learning. And so it's a balance for us as it has been in the last few years of balancing sort of prudent disciplined investment while we grow the business.

Got it. That's great color. And if you're going to deploy capital towards M&A again, do you think some of your consideration or preferences will be different today versus a year or 2 years ago? On that front, with the cash balance at a recent high, how should we think about your capital allocation priorities?

Yes, it remains similar. So it's a balance of making use of our free cash flow to organically invest in the business through our sort of margin profile, but also a balance between a buyback program. We just launched -- relaunched the NCIB program for another year with additional capacity year-over-year. And then we'll also continue to look for opportunities inorganically to add to the business, which we continue to see as a good way to grow the business and really kind of making use of that position as a platform in our ecosystem.

We now have the next question from Thanos Moschopoulos with BMO Capital Markets.

John, now that you've been selling Lumi for a few quarters, any themes you're seeing with respect to the kinds of clients, institutions that are adopting it versus the ones where the sales process has been more challenging? And then any learnings in terms of how do you well -- maybe best manage that process in driving adoption?

Well, I think with Lumi, I haven't really run into clients that say no, just for clarity. It's just taking time for them to actually work through the procurement of it. That's a good question. Most of the clients that I'm talking to now are really just starting with a toe in the water versus jumping in full steam ahead. So they're wanting to try out a smaller adoption of Lumi to support basically stepping into this new technology area versus it being a massive deployment where they upskill all of their people right out of the gate. The one challenge that I think we've got to work on is like internal branding of Lumi in the product.

The one thing that we stood out for us is our clients understand it, our reps understand it, but the actual end users don't know they're actually using Lumi yet. And so we're seeing wild adoption. We're seeing like almost -- well, over 8,000% year-over-year adoption of folks that have implemented Lumi. So the internal utilization is going up. But I think we can turn up the dial a little bit on the growth of Lumi with that continued investment that we're making in the product, but also with helping a little bit of brand awareness within the product itself. Those are important for us to unlock this next level.

That said, pipeline is great. Client response to it has been fantastic. The new technology that we're rolling out to support even now generating new types of content activities within the learning platform, I think have been really well received. And some of the new functionality around virtual tutoring and support on giving feedback to students, also really well received by faculty and also the students themselves. So the team is doing a really good job on delivering great product that's in high demand from clients. I'm not seeing any pushback on the actual product market fit itself. That seems to be hitting really well. I think the key now is for us just to continue to do what we're doing in terms of building a great reference base, building out these efficacy studies, demonstrating real impact and value and getting in the hands of more clients.

Great. And then on the corporate market, just to clarify, would you characterize the growth in corporate as being similar to higher ed? Or is it any better? And then just how have you seen the environment evolve in recent months? And you talked about a healthy pipeline there, but any specific themes or dynamic you're seeing in corporate?

Well, I think maybe Josh can comment on this as well, too. But just from my vantage point, traveling with a number of CEOs in the last 2 months have been an eye-opener. There's a tremendous talent bottleneck in a number of different industries, which we've got to resolve. There's a disconnect between what employees have as knowledge and skills today and what their employees are actually looking for. And so I think there's going to be this big investment in upskilling and also work to be done supporting graduating students into fields that are in high demand, where there's a gap between what the employers are looking for and what the employees or potential employees have as a skill set. So I think this is a tremendous growth opportunity for the future.

And we're digging in with a number of CEOs and actually on another trip starting this weekend with a number going over to France to visit some different industries over there as well as meeting with a few domestic CEOs from here in North America at the same time. I do think this is a big growth opportunity. But the challenge now is making sure that we're well positioned as the next-generation learning platform to support that upskilling of the employee and to help these big companies really tackle these talent bottlenecks, whether it's in semiconductor or power utility or technology, you name it, there's a lot of different industries struggling with this right now.

Yes. Just additional -- Thanos. Yes. So corporate, we continue to see as a market that can grow at approximately or above 15% year-over-year, and that's what we've continued to see. Right now, the training organization part of corporate is where we've seen sort of the most consistent growth. What we're really excited about in addition to that is we're making some meaningful investment this year in our product on the employee training side as well as building out that go-to-market capability under Kevin's leadership, which sets us up very well to start to contribute towards that growth profile in a more meaningful way from the employee training side. So certainly excited about the years ahead as we really mature our position in market.

We have Paul Treiber with RBC Capital Markets.

Just a question on ARR growth. You gave the comment that ARR growth, excluding K-12 was 10% this quarter. How does that compare to the last several quarters? And yes, if you can just put some context around that 10%?

Yes, sure. So this is obviously a year where the North America higher ed market, which is a big part of our business, has had lower new logo activity. So we would expect that profile to be larger in normal periods of time. But where we've sort of outside of that lower macro environment of North America higher education, we're very pleased with the growth in international as well as corporate, we just mentioned. International, this is the second quarter in a row where we've seen ARR grow year-over-year greater than 15%, which is sort of what we've targeted and expected from that business.

And so certainly pleased with some new leadership that joined over the past year and really just across the business, embrace and an investment into the success of our international growth. So slightly lower, Paul, to answer your question, just based on that lower RFP activity level in North America higher ed. In that lower activity environment, we're still winning at a very high rate, and we're confident in our competitive position as that fog starts to lift in the coming quarters.

Okay. That's helpful. And then just on the pipeline, you sound quite bullish on the pipeline. Can you speak to, one, what's driving the momentum that you're seeing in the pipeline? And then secondly, how conversion rates have been tracking, and it sounds like they've increased. And what's been driving the increase in conversion rates?

Well, I can speak to some of that and maybe, Josh, you can fill in any gaps, if you will. But what we're seeing with the pipeline is a slow build. As Josh pointed out earlier, we've been in a situation where a lot of clients in North America, in particular, have had to readjust based upon policy shifts that were outside of their control. So they've gone through some of that shift. And now we're starting to see the pipeline start to rebound even at a faster pace than we did earlier in the year. And that's largely institutions going, okay, we've made our changes that we need to accommodate. And now we're ready to invest to support a better student experience to adopt new AI technologies to support a better learning platform to engage in new activities that are going to help us grow in terms of workforce upskilling. So there's a number of different drivers for that change within the clients.

And what we're trying to lean into is leveraging AI as a key catalyst for a big replacement cycle ahead. We believe that an AI-enabled learning platform, which makes it so much easier to build content, learning activities, assignments, activities to support assessment, interactives, practices, give feedback, provide tutoring. All of these are very compelling and save our clients hundreds of thousands, if not millions, by shifting to us as a platform. We've got to now convert that.

And what we're seeing with the pipeline build, maybe another key nuance is that it's not just coming from the traditional Moodle and Blackboard, it's also now coming from Canvas. We're seeing a good inbound activity from all of those platforms. And I think our team has done a good job over the course of the last 3 years where our win rate has been north of 50% and continuing to tick it up year over year over year, just making ourselves a much better product and also at the same time, delivering better service for our clients, is the reason why many of these institutions want to shift.

That said, like all of our competitors have done their best to keep this -- try to encourage their clients to stay at the status quo and not look to the market. But when they do look to the market, we do very, very well. And so our conversion rate on those opportunities is very high. And so we want to just continue to lean in on that motion and turn that pipeline into significant revenue in the year ahead -- quarter ahead, I should say, too.

We have Suthan Sukumar with Stifel.

For my first question, I wanted to touch on the pipeline color that you provided. I mean it's good to hear that you're seeing this consistent expansion in the overall pipeline. Can you speak a little bit about what might be different quarter-to-quarter and maybe year-over-year with respect to the current sales cycle/sales process as you look at converting that pipeline?

Well, I think the key is we're seeing the fog lifting a little bit. I wouldn't say we're clear at this stage, but we're seeing a natural bounce back in our key markets, international, corporate higher education, even some markets for K-12 globally are seeing the clients have made their adjustments and are now ready to buy. So we're really seeing 2 key things. One, clients that we have really want to invest in new technology like our AI platform, Lumi. Also Creator+ is gaining some significant traction within our base. I'm quite excited about both of those.

And I do think there's a whole other set of services that our clients are going to want to drive. Now we haven't seen it fully tick back up, but we've seen it bounce back up in the last month or 2 is our learning services. That's been a weak spot for us over the course of the last year. But it seems like more clients are now starting to buy those services than we did in the past. And I do expect, hopefully, in the quarter or 2 ahead that, that will bounce back to a much more normal buying cycle as well.

And then on the prospect side, what you have is all of our main competitors are running legacy technologies that are not AI -- fully AI-enabled. They're making announcements about strata to support AI, but by and large, it's mostly vapor for most of our competitors. And so I think the market is waking up to needing AI to support the workflows that all the students and faculty use globally. And that's a compelling factor for us building pipe and also now converting it into one opportunities.

Okay. Great. No, that's helpful. For my second question, I wanted to touch on the corporate learning opportunity. I think earlier in the call, you touched upon adding more resources to focus on the employee training use case specifically. Can you talk a little bit about what's left to do from a product perspective? And given the new leadership hire here, when do you expect to be able to go to market with that refined go-to-market strategy and product offering to truly capture that opportunity?

Yes. So I think the way I would frame it is our product is extraordinarily good at delivering a fantastic learning experience. So building incredible learning activities that are engaging, that are inspiring that aren't your typical corporate boring laughable typical experience when it comes to compliance as an example. Many employees will laugh if you ask them, do you enjoy your learning experience today? It's largely old technologies that have been around for 20, 30 years, that's what the current state-of-the-art is in corporate.

And so we're coming in with a modern, fresh approach to delivering that learning experience. But what we're missing is some of the admin capability that some of these other platforms have built out that grew up in corporate. The admin capability in a traditional higher education system was set up by the SIS and other vendors. And so we've got to close those gaps as quickly as possible. And we're working through many of them. So we launched, for example, 2 months ago, a good set of capability that closes a number of those gaps, and we'll continue to close more in the future. But for clients that are looking to upskill their people with the best possible learning experience and don't mind a little bit of extra administrative overhead, we're the perfect solution for them today. And I can assure them that we'll be the easiest to use platform on the admin side in not the too-distant future.

We have Brian Peterson with Raymond James.

Just one for me. So John, I just want to make sure we understood on the K-12 side. for the customers, are some of those leaving D2L altogether and maybe there isn't that opportunity to reengage? Because I think you used the word pullback or maybe is this something where they're spending a little bit less and then you have the opportunity. Is there any way to kind of segment of the customers that are transitioning? How many are still remaining customers and how much they are still remaining versus some that you could win back?

Yes. Well, the majority that we're talking about here are sort of downgrading, going back to more of a traditional model. So it's more of a pullback in terms of their investment in digital. But I do expect to regain some of that footing with those clients as they understand the use case a little bit better and as they want to embrace technology to support the traditional class experience, we're actually a great fit for that model. The other -- there's 2 or 3 clients that are actually transitioning to a competitor over the course of the next year. That's a bit more painful for us. Also, I think it's been very hard for the customers that are actually going through the transition as well. We're very good at supporting these large implementations within the CUS market with a premium learning experience.

And I think our competitors are struggling with those transitions. So I'm not counting out our ability to go back and win back some of those accounts over time. But we're also learning some lessons in terms of like what we've got to do to make sure that we've got the right relationships, and we're building the right shared vision for the future. There are some things that we've learned as lessons as well. But it's a small number. It's just -- it is a painful air pocket for us right now in K-12 U.S.

[Operator Instructions] And we have [ Daniel [indiscernible] with Iberian Asset Management. ]

I have a question about the share buyback program. Is the primary intention of this program to offset the dilution from options and restricted share issues? Or is there more to it? And if it's just to offset dilution, is there sort of any price you pay when you buy back shares?

Yes. Thanks for the question. Yes, the buyback program is really a consideration of multiple things, which can include sort of the dilutive consideration, which for the past 2 years, we've been less than 1% in our dilution. And then we're also contemplating sort of the various alternative uses of cash and what we believe to be the return sort of profile of those uses of cash. And so we do foresee continuing to make use of the buyback program for the next year as part of that NCIB program we just launched this week.

Thanks, Daniel. I think that's the first investor call that we've ever had in terms of having investors speak on the call. So I really appreciate it. Thanks for the question.

Well, thanks for letting me on.

Thank you. I can confirm we currently have no further questions. So I would like to conclude the question-and-answer session. And I'd like to now hand it back to John Baker for some final comments.

Well, thank you, everyone, for joining us today on our call, and we're looking forward to updating you after our Q4 results. Have a good holiday season, and I look forward to joining you in the new year. Thank you, everybody. Have a good day.

Thank you for all attending. I can confirm that does conclude the D2L Inc. Q3 2026 Financial results. Thank you all for your participation, and please enjoy the rest of your day.